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Pfizer offers a Total Yield Stock Play with an Increasing Dividend Payout

While income investors constantly seek out stocks with growing dividend yields, they can also benefit from share buybacks.  The share buybacks present an opportunity for investors to get capital gains in addition to current income.  Currently, 80% of S&P 500 companies are buying back shares. Combine this with dividend yield and you can get a total yield of greater than 10% in 2014.  We are presenting a series of stocks worth a look.

Pfizer (PFE) has a projected share buyback yield of 14% and a current dividend yield of 3.49%.  This provides investor a potential for a total yield of 18.2%.  The stock has a 12 month price target of $33.

Investors were pleased to hear that the company intends to increase its dividend payout ratio to 40% (from 33%) by the end of 2013. The company returned about $15 billion to shareholders in the form of dividends and share buybacks in 2012. Pfizer intends to use the proceeds from the sale of the Nutrition business on additional share repurchases and other value creating opportunities.

On 7/30/2013, the Board of Directors authorized a new$10 billion share repurchase program to be utilized over time. This new program is in addition to the$3.1 billion of authorization currently remaining under the previous share repurchase program.

Pfizer posted second quarter 2013 earnings of $0.56 per share, 5% below the year-ago earnings. Revenues, which fell 7% to $12.9 billion, missed the Consensus Estimate of $13.1 billion. Revenue growth was impacted by the loss of exclusivity of certain products and purchasing patterns for Prevnar/Prevenar in some markets.  Pfizer maintained its outlook for 2013. Revenues will be hit by genericization and the expiration of a few co-promotion agreements. The company s pipeline needs to deliver given the Lipitor loss of exclusivity and the upcoming loss of exclusivity on additional products in the next few years.

We expect revenues in 2013 to decline about 12%, primarily reflecting the classification of the animal health business (divested in June 2013) as a discontinued operation. We also project lower sales of established drugs, largely due to ongoing generic erosion in off-patent Lipitor, Detrol and Xalatan, as well as the expiration of certain co-promotion agreements.  However, we project continued gains in Lyrica muscle pain therapy and Celebrex arthritis treatment. We also forecast good growth from emerging markets, new oncology agents such as Xalkori and Inlyta, and from the recent launches of Xeljanz and Eliquis.

In July 2013, PFE announced plans to internally separate into three distinct business segments, two innovative units and one value business.  The first innovative unit will comprise drugs with patent exclusivities beyond 2015. The second innovative segment will include vaccines, oncology agents, and consumer healthcare.  The third value unit will consist of mature drugs, and joint venture products. We believe the new structure should provide investors greater transparency of PFE’s different businesses, and represents a prelude for a potential eventual split-up of Pfizer into three separate firms.

Building a High Dividend Yield, Low Beta Income Portfolio (Part 3)

For income investors wanting to go it alone, they should consider creating a portfolio of high dividend stocks with low beta.  This type of portfolio will provide a risk to reward profile during times of uncertainty in the markets.  By adding the component of a bullish outlook to the low beta stocks indicates these stocks can be held in a long-term portfolio.  The high dividend yield can be compounded over time and will increase as these stocks raise their dividends each year.  This portfolio will be built in a series of articles.  You can read Part 1 here and Part 2 here.  Below is Part 3 with more stocks to look at for adding your portfolio.

Philip Morris International Inc. (PM) manufactures and sells cigarettes and other tobacco products.  Separated from operations in the U.S. and the
regulatory and litigation risk of that market, PM will, in our view, be better positioned to innovate, tailor offerings to higher-growth emerging markets,
achieve cost savings, and incentivize managers.  We think PM’s low penetration of markets with potentially high cigarette consumption, such as China, India and Vietnam, also provides attractive opportunities.  Also, the spinoff provided PM with currency for acquisitions.  We believe its high cash flow generation is
supportive of regular stock repurchases and its dividend, which recently yielded 3.5%.  PM increased its dividend 20% in the last year.  PM has a 3-year beta
of 0.61.  PM has an equity summary score of 9.7 out of 10 for a VERY Bullish outlook.

Pfizer Inc. (PFE), a biopharmaceutical company, engages in the discovery, development, manufacture, and sale of medicines for people and animals worldwide.  The world’s largest pharmaceutical company, Pfizer produces a wide range of drugs across a broad therapeutic spectrum.  In October 2009, PFE acquired rival drugmaker Wyeth for some $68 billion in cash and stock.  Although we expect the loss of U.S. patent protection on Lipitor and negative foreign
exchange to result in lower earnings this year, we think the decline should be cushioned by strength in several key pharmaceutical lines, growth in emerging
markets, cost restructurings and common share buybacks.  The company recently announced a $10 billion buyback, of which $5 billion is expected to be purchased in 2012.  We are also encouraged by PFE’s pipeline, which comprises potential breakthough treatments for arthritis, heart disease and other conditions, as well as by the planned spinoff to shareholders of non-core businesses.  PFE has a dividend yield of 4.03% and a 3-year beta of 0.75.  PFE increased its dividend 10% in Q1 2012.  PFE has an equity summary score of 7.4 out of 10 for a Bullish outlook.

Johnson & Johnson (JNJ) engages in the research, development, manufacture, and sale of various products in the health care field worldwide.  We believe
JNJ’s diversified sales base across drugs, medical devices and consumer products, along with its decentralized business model, has served it well in the past and should continue to do so in the years ahead.  In our view, JNJ’s pharma segment should benefit from a number of key new products, including Xarelto blood thinner, Incivek treatment for hepatitis C, Zytiga for prostate cancer, and Edurant for HIV.  In late April 2011, JNJ agreed to acquire Synthes for $21.3 billion in cash and stock.  We see significant operating synergies accruing from the proposed Synthes combination, which is expected to be completed in the
first half of 2012. JNJ has a dividend yield of 3.59% and a 3-year beta of 0.49.  JNJ has a 5-year average dividend growth rate of 8.23%.  JNJ has an equity summary score of 8.2 out of 10 for a Bullish outlook.

Dividend Stocks with Bond-like Yields

While some wonder if dividend investing is a fad, the strategy probably has staying power. Bonds yield little, and short-term rates are near zero, leaving individuals with few places to find yield. Demographics favor income investing; millions of baby boomers retire each year, and they want income to supplement Social Security and minimize the drawdown of retirement assets.

Opportunities are limited in the bond market, with Treasuries topping out at 3% and high-quality 30-year municipals at only 3.5% after a sharp rally in recent months. These yields are near the lows of the past 50 years.  Companies with high and sustainable dividends are often valued more like bonds than stocks, partly because 4% and 5% dividend yields often are higher than the rates on many corporate bonds.

A 4% dividend seems to resonate with investors who are willing to pay premium prices for companies with high yields. Some of the strongest S&P 500 industry groups last year — utilities, consumer staples and drugs — had some of the index’s highest yields.  During 2011, high-dividend payers were the top-performing group in the S&P 500, with the top 50 yielders at the start of 2011 — all with 4%-plus yields — returning more than 8% (not including dividends), compared with a flat showing for the entire index, according to Birinyi Associates.

The companies on the list below, including Merck (MRK), Pfizer (PFE), Waste Management (WM) and American Electric Power (AEP), have sustainable dividends and reasonable price/earnings ratios.

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The Best Dividend Stocks for 2012 – Health Care

S&P recommends marketweighting the S&P 500 Health Care sector. Year to date through November 18, the S&P Health Care Index, which represented 11.6% of the S&P 500 Index, was up 4.0%, compared to a 3.3% drop for the S&P 500. In 2010, this sector index rose 0.7%, versus a 12.8% advance for the 500. There are 10 sub-industry indices in this sector, with Pharmaceuticals being the largest, at 51.7% of the sector’s market value.

S&P equity analysts have a neutral fundamental outlook on the key Pharmaceuticals sub-industry. We think this sub-industry faces challenging prospects in 2012, given an impending “patent cliff” beginning this year, austerity pricing in Europe, increasing generic drug penetration, and what we consider unimpressive new drug pipelines. On a positive note, emerging market sales are expected to continue to grow briskly in 2012. Also, increasing biotech M&A, low HMO utilization rates, attractive pharmaceutical sub-industry dividends and more efficient R&D spending offset the aforementioned negatives, in our view. According to Capital IQ, the sector’s P/E multiple of 10.7X consensus estimated EPS for 2012 is below the broader market’s P/E multiple of 11.3X. Its P/E-to-projected-five-year EPS growth rate (PEG) ratio of 1.3X is above the market’s PEG ratio of 1.0. This sector’s marketweighted S&P STARS average of 3.9 (out of 5.0) is slightly above the S&P 500’s 3.8.

The S&P GICS Health Care Index has broken out from a bullish, double-bottom reversal pattern, turning the intermediate-term trend to bullish, in our view. The sector also broke above a bearish trendline off the highs since July, confirming to us the trend change. Prices have popped back above both the 17-week and 43-week exponential moving averages, and the shorter average is back above the longer average, also bullish signs, in our opinion. Prices now face a small region of overhead supply between 400 and 420. Relative strength versus the S&P 500 was in an uptrend from February until the end of September, but that uptrend has broken to the downside. We have lowered our technical opinion on Health Care to neutral with a bearish bias, from neutral.

We recommend marketweighting the sector as we think an attractive valuation already reflects widely appreciated weak pharmaceutical drug pipelines and is therefore fostering more competitive performance as investors focus on newer positive catalysts and the sector’s defensive properties.

While patent expirations are hurting AZN’s growth profile, the company is making strides to launch new products, and currently approved drugs are still posting steady growth. We believe Astra’s most important new drug launches are diabetes drug Onglyza and cardiovascular drug Brilinta, which are showing respectable launches; we believe both drugs will eventually develop into blockbusters. Also, in-line products are generating steady growth, with the company’s leading drug Crestor up 14% operationally from the prior-year period. Despite mixed results against Lipitor, we believe Crestor sales will hold up well against low-cost generic versions of Lipitor expected by the end of the year.

Sanofi-Aventis’ (SNY) wide lineup of branded drugs and vaccines and a robust pipeline create strong cash flows and a wide economic moat. Growth of existing products and new product launches should help offset patent losses for cancer treatments Eloxatin and Taxotere as well as anticlotting agent Plavix.  Sanofi has compiled a robust group of late-stage pipeline products that complement its existing lineup and should help mitigate patent losses. We expect continued strength in the oncology class with potential blockbuster Zaltrap emerging from the late-stage pipeline. Also, diabetes drug Lyxumia looks to be a strong complement to the company’s well-entrenched diabetes franchise.

The table below shows the list of health care stocks making the high yield dividend stocks with bullish equity scores.

list of health care stocks making the high yield dividend stocks with bullish equity scores

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