Why Investors Should Take a Look at Biotech Stocks

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%.

 

amgn
 

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.

 

gold
Source: BitGold

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.

12 thoughts on “Why Investors Should Take a Look at Biotech Stocks

  1. DH,
    I agree that biotech stocks can be less than soothing to own in one’s portfolio. Certainly not as comfortable as the JNJ’s of the world. However, I think there is room for at least a little bit of biotech in our portfolio. Until recently, my only healthcare stock was JNJ. Back in September, I added AMGN at $138. Yesterday, I increased our holdings by 50% at $144.50. It’s now has slightly less than 3% NAV weight, which is about where I want it to max out. I consider it a supporting position, rather than core.

    Dividend growth has been lacking as of late for me. Everything I read seems to peg AMGN as among the strongest plays in the sector. While they don’t have any lengthy history of dividend growth, I like what I see so far. Hopefully, it will add a bit to div growth in the future. I have to make myself ready for higher volatility if I want to own this stock. Assuming I can get comfortable with that, I think it’s a stock to hold for the long haul.

    In the end, I agree with you on AMGN. Now as for gold…. I’m still not sure about that :-). Thanks for the article.

    Steve

    • Hi DG,

      There’s no question that owning any biotech stock can be a little uncomfortable at times as it is a very volatile sector. Of course, within the space there are certain standouts like AMGN that appear to be on more solid footing than some of the other smaller players. For now, I have two biotechs on my watch list, AMGN and GILD and would only consider those names for my dividend growth portfolio. The truth is that those companies are putting up some serious dividend growth rates which can definitely help move that dividend snowball along quite nicely. As always I appreciate your comment and thoughts on the sector.

    • Hi KeithX,

      I’m just watching AMGN and GILD from the sidelines. I feel like I’m missing out sometimes when I read about the insane dividend growth rates of these companies. Not against biotech, I have those two names on my watch list, just focusing on my current holdings for now. Thanks for introducing BIIB to me and for commenting.

  2. Biotechs are definitely worth a consideration in any portfolio, just depends what you’re looking for. CSL is one of Australia’s biggest companies http://www.csl.com.au/ I do intend to own it one day, there’s a lot to like about it. A great dividend history, just not much yield at the moment.

    CSL has a large presence in the USA. A little quote: ‘Plasma products
    CSL is a leading manufacturer in a US$24 billion plasma industry. A continual focus on innovation in new products, improved products and manufacturing know how is the key to future growth.

    The key businesses involved with plasma products include:

    CSL Behring is a global provider of plasma-derived & recombinant products. We operate one of the world’s largest plasma collection networks through CSL Plasma
    CSL Behring is the chosen national plasma fractionator of Australia, New Zealand, Hong Kong, Malaysia, Singapore and Taiwan.’
    Tristan @ Dividendsdownunder recently posted…Dividend update: December 2015My Profile

    • Hi Tristan,

      The biotech sector is a little too volatile for my liking but I would consider a small portion of my overall portfolio dedicated to the space. Of course, I would consider AMGN and GILD as I see those two as the more “solid” names in the sector.

      Thanks for sharing CSL with us. Sometimes low yield is OK as long as there is a high dividend growth rate for several years. I have to admit I do not know anything about the plasma industry but it does look like a large enough market to tap into. As always, I appreciate you stopping by and sharing new dividend stocks with us.

  3. I love my Biotech stocks. I own GILD and AMGN. As for volatility, I love that too. I’ve been reducing my cost basis by selling options.

    I don’t normally do this, but I also bought a bunch of AMGN and sold it for a $800 profit one day later. Market volatility made this possible. For now my cost basis for GILD is $94.87 and AMGN is $106.29.
    Investment Hunting recently posted…My 2016 GoalsMy Profile

    • Hi IH,

      Looks like you have been doing well with your biotech holdings. It’s true that volatility brings opportunity for quick profit as you have captured. I do like to sleep at night and not have to worry about my holdings but do admit that I feel some small portion of my overall portfolio can sustain some growth and volatility with names like AMGN and GILD. As always, I appreciate you stopping by and commenting.

    • Hi Integrator,

      You have not shied away from this sector by your holdings. Looks like you stuck with the quality big name players. On my watch list I have AMGN and GILD and I can see myself adding to those names one day. For now my focus is on my existing holdings but some high growth diversity with strong dividend growth is definitely warranted. Thank you for stopping by and commenting.

  4. Good article. I own AMGN and a much smaller riskier company called Inovio (INO). It doesn’t pay a dividend but hoping that it will grow to become the next AMGN or GILD in the future. There’s a bunch of good mid-to-large cap biotechs out there too. BMY, which I had owned in the past but then sold for lack of consistent dividend increases, is another good example of a major player in the immunotherapy industry. It does pay a dividend just has not been as consistently raising it.

    Scott
    Scott @ TwoInvesting recently posted…Scott’s Goals for 2016My Profile

    • Hi Scott,

      The biotech sector can definitely add some spice to your portfolio as wild price swings seem quite common among smaller and larger companies for that matter. I have AMGN and GILD on my watch list and those would be the only two names I’d consider as pure biotechs for my own portfolio. I like to sleep at night and this is a sector that certainly does not allow for that. Of course, I would be comfortable with a small percentage dedicated in this space. Thank you for sharing your holdings in this sector and for introducing INO to me.

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