Stable pharma dividends offer shelter from storm


Battered drugs stocks are regaining their allure as a safe haven as investors focus on stable dividend yields at a time when payouts in other sectors - notably financials - look increasingly uncertain.

Apart from a brief surge in January, drug shares had largely failed to show their defensive colors in this year's market turmoil as worries over generic competition and slowing sales growth hobbled big-name stocks.

Now, some value investors are scenting a good deal.

“The dividend risk on any of the five European large-cap pharma names is very, very low and any risk to their share buybacks is pretty low as well,” said Ben Yeoh, pharmaceuticals analyst at Dresdner Kleinwort.

Drugs stocks were among the top gainers in Europe on Thursday, as a profit warning from Credit Suisse and continued credit market fears took a further toll on banks.

GlaxoSmithKline Plc, AstraZeneca Plc, Sanofi-Aventis and Novartis AG advanced around 2% by mid-session.

The golden era of pharmaceuticals as growth stocks may be over, with firms such as Glaxo and Astra trading on just 11 and 9.2 times forecast 2008 earnings respectively, but cash-flows remain robust - and the sector is placing more emphasis on capital returns.

As a result, Glaxo and Astra trade at an unprecedented yield of 1.2 times 10-year UK government bonds, analysts at Citigroup said in a recent note.

European peers cannot match that but Sanofi's yield is on a par with the 10-year European bond yield while Novartis yields 0.7 relative. Roche Holding AG, whose exposure to the fast-growing cancer drug market puts its stock at a hefty premium, is the outlier on 0.45 relative.

The European drugs sector offers a prospective 3.5% dividend yield for 2008, and the biggest name - Glaxo - a chunky 5%.

That may be below the 6.5% yield of the bombed-out banking sector, according to Reuters data, but confidence in the future level of financial dividends has been shattered.

“The yields on banking stocks are questionable. It really depends on potential provisions in earnings, and if these earnings turn out to be a loss, no question the dividend will suffer,” said Emmanuel Morano, head of equity management at La Francaise des Placements in Paris.

As a result, drug companies' relative advantage is coming to the fore.

“While the headline yield may be lower in sectors such as pharma, they would appear to be more attractive from a dividend point of view,” said Stephen Surpless, senior analyst at Cantor Fitzgerald.

Veteran investor Warren Buffett appears to agree.

His holding company, Berkshire Hathaway Inc, recently revealed increased stakes in Glaxo and Sanofi, reflecting his appetite for businesses with strong cashflows that happen to be relatively cheap. (Reuters)

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