The following is a guest blog post:
Biotech is said to be the new gold mine. Several companies have had astonishing growth rates during the last decade and investors made big money. Nevertheless, many retirement investors still exclude the biotech sector completely. That, however, is a mistake.
The common argument is that biotech is riskier than other sectors. In general, that’s true. Biotech companies, on average, are leveraged higher than other sectors and biotech companies do often face a significant business risk. If their innovations become successful, they will make huge profits, if they turn out to be a flop, the company will most likely go bankrupt.
Therefore, biotech companies offer high returns but bear high risk. However, retirement investors want to keep their risk low while generating a steady return. Hence, it seems that these stocks don’t fit into the portfolio of the average retirement investor.
Biotech is on average riskier than other industries, however, there are some well diversified large cap stocks that are attractive for conservative investors
Although the above argument is true, it is misleading. The risk composition in the biotech sector differs from other industries. The majority of biotech companies are either start-ups in the development stage or they just reached the commercialization stage. Those businesses are mostly small and mid-cap companies and most of them have only one or two products in their pipeline. Hence, they bear high risk and don’t fit to a retirement investor’s preferences.
However, looking at large cap biotech stocks, the picture is different. These companies have already sold their first blockbuster drugs and sit on high amounts of cash. Amgen, for example, holds more than $30 billion in cash while facing about the same amount in long term debt and about $7 billion in current liabilities. Moreover, these companies are much more diversified and experienced and although they are already more mature, they still benefit from high growth rates.
Biotech giant Amgen just hiked its dividend by 27%; pharma-biotech hybrids offer attractive dividend yields as well
Besides the risk return profile, retirement investors look at dividends. Although, there might be more interesting sectors than biotech, some of the large cap stocks are worth looking at.
Last year, biotech giant Amgen paid a dividend of $3.16 per share, which is equal to a dividend yield of 1.90%. That’s not super exciting, but not too bad either. 1.90% is about equal to the average in the S&P 500. However, Amgen’s free cash flow payout ratio is about 30% and there is more than enough space to grow the dividend further.
That’s why in December 2015, the company hiked its first quarter dividend by 27%. That represents a dividend yield of 2.46%. Moreover, the management announced that they want to return about 60% of net income to shareholders by 2018.
Other attractive dividend stocks are the leading pharma-biotech hybrids like Novartis, Sanofi or Roche. These companies look back at stable dividend histories as well. Last year, Sanofi paid a dividend yield of 3.77%. Novartis paid a dividend yield of 3.10%, and Roche paid 2.91%.
Biotech sales grow at an annual growth rate of about 8%; stable large cap biotech stocks are an attractive long term investment
There are indeed some strong and diversified players, that do not only offer a balanced risk return relation, but also an attractive dividend yield. Investors shouldn’t necessarily overweight biotech, but it is a valuable addition to a diversified portfolio.
Considering the growth perspective of the biotech sector, it’s not smart to generally exclude it from your retirement portfolio. According to McKinsey, biopharma makes about 20% of the whole pharma market sales and grows at an annual growth rate of about 8%, about twice the rate as conventional pharma.
It’s hard to outperform such growth rates. That’s almost as good as the compound annual growth rate of gold, which had a quite impressive performance during the last decade.
Just as gold should be a vital part of every retirement portfolio, biotech should be included as well. As always, it all comes down to picking the right stock. Don’t let the industry ratios fool you. Just because the sector as a whole bears more risk than other sectors, that doesn’t mean that there aren’t any great companies in there.