Dividend stocks can be a great source of passive income that can help smooth out losses during market downturns. Companies that pay dividends can also help offset (or reduce) the effects of inflation. The only thing better than a dividend-heavy stock, however, is a dividend-heavy stock that trades at an attractive valuation. Let’s look at two stocks that investors looking for income would do well to buy at current levels: Merck (MRK -0.09% ) and Viatris (TRV 2.29% ).
Pharmaceutical giant Merck is currently posting an above-average dividend yield of 3.3%, supported by solid activity. The drugmaker’s lineup includes flagship cancer drug Keytruda, a pair of HPV vaccines and a growing animal health business. Keytruda has been approved for dozens of indications in the United States and elsewhere, and it continues to increase sales at a good pace. In 2021, sales of the cancer drug were $17.2 billion, up 20% from the prior year.
Keytruda is still gaining new indications. Investors can expect this cancer therapy to continue to contribute to Merck’s revenue. The company’s HPV vaccines, Gardasil and Gardasil 9, performed well last year. Combined sales of these products were $5.7 billion, 44% more than in 2020. Meanwhile, Merck is a strong player in the animal health industry. According to the company’s CEO, Rob Davis, Merck’s animal health business “remains very well positioned to grow faster than the market in the future.”
Consider that in 2021, sales for Merck’s animal health unit grew 18% year-over-year to $5.6 billion.
By comparing, Zoetis, one of the world’s largest animal health companies, reported revenue of $7.8 billion last year, representing a 16% year-over-year increase. Zoetis has a history of growing its revenue faster than the industry average. By some estimates, the animal health market will grow at a compound annual rate of 10% through 2030. Merck stands to benefit from this long-term trend. Overall, Merck’s revenue for 2021 was $48.7 billion, a 17% year-over-year increase.
The company’s adjusted net income rose 33% year over year to $15.3 billion. Merck’s price-to-earnings (P/E) ratio of 11.1 is currently below that of the pharmaceutical industry at 12.3. In my view, Merck shares would be worth buying even at a slight premium given the company’s current lineup, pipeline and success as a drugmaker.
Merck is a great choice for value and dividend investors at current levels.
Generic drug maker Viatris was born when Pfizer spun off its off-patent pharmaceutical business, Upjohn, which merged with the company formerly known as Mylan. This new entity began its activities in the market in November 2020. Viatris offers an impressive range of products, including many relatively well-known brands such as Lyrica, Xanax, Viagra and Lipitor. While generic drugs generally do not benefit from patent protection, Viatris has the advantage of having products that benefit from a certain notoriety.
Consumers tend to gravitate towards products with which they are familiar. This is good news for Viatris’ business. The company is, of course, working to launch new drugs in addition to its approved portfolio of more than 1,400 products in numerous therapeutic areas. Approximately 75% of the Company’s pipeline consists of complex generics and biosimilars.
These are generally more difficult to produce and therefore face less competition in the market. The company has also moved into higher margin products by divesting some of its assets. Viatris’ financial performance in 2021 was not impressive. For example, the company’s total sales declined 2% year-over-year on an operating basis to $4.3 billion.
Investors should expect some volatility as Viatris focuses on optimizing its business for the future. But the drugmaker is in it for the long haul. With a hefty dividend yield of 4% and a forward P/E of just 3.2, Viatris is an attractive option for investors looking for income.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end advice service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.