Top 5 Chemical & Pharma Stocks to Invest [2019]

Top 5 Chemical & Pharma Stocks to Invest [2019]

1. Introduction

Did you ever wonder what the top 5 Chemical & Pharma stocks to invest in are?

Do you want to make a long-term, dividend paying stock investment in 2019?
Are you especially looking for sustainable, high dividend stocks in the Chemical & Pharma industry?

In this article I will answer exactly these questions and tell you what you need to know about these value stocks!
Specifically, it will assess the top 5 Chemical & Pharma stocks to invest in 2019 in terms of basic company as well as stock performance.

This is what you will get out of this article:

  • What are the characteristics of the Chemical & Pharma industry in an investment context?
  • What are the best dividend stocks, i.e. top 5 companies in the Chemical & Pharma industries to invest in?
  • How do these companies perform, in terms of fundamental company analysis and basic stock market analysis?

2. Characteristics of the Chemical & Pharma industry

Before we talk about the top 5 chemical & pharma stocks to invest in, let’s first look at the two industries as a whole.

To make a sound, well thought out, and sustainable investment decision, we need to know how the Chemical & Pharma industry is defined.
What products or services does it produce or provide? Which are the main players in the industry? How is it characterized, especially in light of fundamental and stock analysis?

Now you wonder why I am combining both? Although the Chemical and the Pharmaceutical industry are quite different? Indeed, they are separate industries with unique characteristics.

Therefore, I will separate the industries when talking about their products and competitive landscape. When talking about overall characteristics and selecting the top 5 companies to invest in the Chemical & Pharma industries, I will merge them again.

Since we are looking for THE best stocks for 2019, looking at both industries at the same time will get us a more focused selection.

2.1 Products and Services

Chemicals

Chemical prodution plants heavily polluting

Companies active in the chemical industry produce industrial chemicals, which are used in a variety of circumstances and are usually further processed.
Specifically, (a mixture of) raw materials such as oil, gas, water, air, or minerals are processed through a series of complex steps resulting in >50,000 different products.

Products of the chemical industry can be primary, secondary, or tertiary. This is based on the number of processing steps involved and remoteness of the final products from the consumer. Primary products are most remote from consumer, i.e. closest to the raw materials.

The chemical industry is quite difficult to define. This is due to its strong interactions with and relations to a number of adjacent industries. For example the plastic industry or the petroleum industry.

Pharmaceuticals

Pharmaceutical drugs randomly thrown on table

The pharmaceutical industry deals with the discovery, development, enhancement, production, and selling of market and pharmaceutical drugs.
We use these drugs to medicate people or animals, to cure them from diseases, or vaccinate them against contagious diseases.

Overall, pharmaceutical treatments shall enhance the quality of life of people and animals and improve the world’s health standards.
The world’s population – and with that its diseases and health system – is constantly evolving and getting more and more complex. Therefore, new demands and needs from pharmaceuticals arise.

This is why one of the most important contributions of the pharma industry is the engagement in technological advancements. This is achieved through constant and innovative research and development.

2.2 Competitive landscape

Chemicals

In 2018, world chemical sales were about 3,800 USD BN (Link), of which about 40% were generated in China. Following China, the USA and Germany account for the second and third largest chemical sales globally, with 14% and 4% respectively. According to C&EN (Link), global sales and profits strongly increased. Recently, there have been some big merges in the chemical industry:

  • Dow Chemical and DuPont merged effective as of September 1st, 2017 becoming the second largest player worldwide
  • Linde (#14 according to 2017 sales) is about to merge with Praxair (#26 according to 2017 sales)

Nevertheless, the industry’s top player, the German-based company BASF, remains number one with about 70 USD BN in total sales in 2017. It closely followed by the newly merged DowDuPont and Sinopec, China’s largest chemical producer.

Global chemical sales per world region 2018

Pharmaceuticals

Global pharma revenues have strongly been increasing in recent years. In 2016, they reached 1,105 USD BN (Link). The pharmaceuticals market is constantly evolving at a very fast pace and generally highly profitable once a company has developed a stable footprint with popular products.
Hence, there are some companies that dominate the market with e.g. blockbuster (i.e. a drug that generates >1 BN of annual sales) or other drugs.
Top five pharma companies in terms of global sales 2016 are Pfizer Inc., Novartis AG, F.Hoffmann-La Roche Ltd., Sanofi, and Merck & Co. Inc.

Now we know how the competitive landscape of the two considered industries is broadly clustered. Next, we want to know how the chemical and pharma industries are characterized, to identify the top 5 stocks to invest in.

2.3 Industry characteristics

Overall industry characteristics

If you decide to invest into chemical or pharma stocks, you need to know what drives the companies’ business. Further, you should be aware of any industry characteristics, especially those related to company or stock valuation.

The following list will give you a high-level overview of characteristics of the chemical and pharma industry:

  1. There is no/ little seasonality
    • People consume and live throughout the entire year (thus, need e.g. things like toiletries, detergents, or colors in February as well as in September)
    • People continuously need drugs (when there is winter in the US and people get sick, there is summer in Australia and vice versa)
  2. The industries are rather concentrated, i.e. there are a few very big and dominant players in the market
    • Nevertheless, consolidation can still take place (see e.g. Dow Chemical and DuPont)
  3. Most companies have a solid financial foundation and outlook
    • Generally, the industry is market by highly profitable business with strong free cash flows and returns on capital
    • This is, however, only a general tendency and every single company has to be analyzed individually as well
  4. Yet, research and development is very expensive and time-consuming
    • Drug development can take up to 20 years from drug discovery to market approval
    • Still, drugs and chemicals are products that almost every human individual needs in daily life – now and in twenty years

Knowing the very basics about the chemicals and pharma industries, let’s take a look at the overall performance of those industries. On a standalone basis as well as compared to other industries. By doing so, we come closer to identify the top 5 stocks to invest in the chemical and pharma industries.

 

Basic industry KPIs

Three fundamental KPIs amongst others for chemicals and pharma are:

  • Current dividend yield: ~3%
  • Dividend payout ratio: ~68%
  • Graham number to share price: ~3.3

Overall, current dividend yield of chemical and pharma companies is with ~3% decent and higher than for other industries, such as IT, software or technology.

Dividend payout ratio of chemicals and pharmaceuticals is with about 68% one of the highest across the considered industries.

A rather high dividend payout ratio is typical for mature industries, with only little growth potential. After having paid for investing or financing activities, most of the earnings are then spend on investors.

However, you have to be careful with very high dividend payout ratios: since you as an investor like to have sustainable dividend payouts there should always be room for improvement in terms of dividend payouts.

The current Graham number to share price for chemicals and pharmaceuticals is about 3.3. Since a value below one indicates an undervalued stock, we see that the considered pharma and chemical stocks are on average overvalued.

Yet, we want to make sure to not miss out a potential opportunity to invest! Thus, we take a closer look at some selected, the top 5 pharma and chemical stocks to invest in the following chapter.

3. Top 5 stocks to invest in the chemical & pharma industries

You want to know which are the top 5 chemical and pharma stocks to invest in 2019?

If you want to invest in these high yield and long-term values, obviously you need to know who they are! To identify the top companies in this industry, we make use of basic fundamental stock analysis.

Broadly speaking, we considered a variety of different fundamental stock key performance indicators (KPIs). Out of an initial long list, we have chosen 10 KPIs with very high significance.

Then, we have defined a straightforward logic that assigns an assessment score to each individual stock based on its performance along the 10 selected KPIs.

Finally, those stocks with the highest score are then selected as being most attractive. After having completed the above-mentioned analysis and comparison of the chemical and pharma stocks considered, we identify the top 5 industry stocks to invest:

Company Coloplast Novo-Nordisk Lyondellbasell Industries Pfizer AbbVie Inc.
Country Denmark Denmark USA USA USA
Dividend Yield (%) 2,15 2,52 4,21 2,91 2,94
Dividend increasing 5 Years? True False True True True
Dividend Payout Ratio (%) 89,3 48,9 37,2 77,8 60,4
Graham Number / Stockprice 6,49 9,3 1,18 1,55 4,92
EPS 5 Year Average (%) 11,34 14,65 19,98 12,65 0
Revenue 5 Year Average (%) 7,09 7,44 -5,33 -2,29 8,95
Net Income 5 Year Average (%) 11,59 12,21 11,37 79 0,13
Operating_Margin 32,4 43,8 15,8 26,8 34
ROE (%) 68,91 80,2 65 32,58 108,56
Debt/Equity 0,02 0,96 0,47 6,07

Let’s take a quick look at the revenue development of these five companies: except for Pfizer and Lyondellbasell Industries the top five chemical and pharma companies have experienced constantly growing revenues over the past ten years. Novo-Nordisk has been growing largest with a CAGR of 9% (2009-2018).

Pfizer and Lyondellbasell have been experiencing a similar revenue development until 2014, after which Pfizer could keep its revenues stable, whilst Lyondellbasell experienced a further decline with a low in 2016.

Thus, solely looking at revenue development, Novo-Nordisk, Coloplast, AbbVie constitute the three chemical and pharma companies with the best historical performance.

Still, we yet cannot tell which are the best, top 5 stocks to invest in both, the chemical and pharma industries. Thus, to make an even better-informed decision, let’s look at the five companies individually…

4. Fundamental company analysis and stock performance of the top 5 chemical & pharma stocks to invest

YieldReview.com_Simple framework for financial analysis and best dividend stock selection

In the previous section, we have selected the top 5 chemical and pharma stocks to invest in 2019. Next, we want to do a comprehensive analysis of this selection. Therefore, we have come up with a simple, universally applicable, and fundamental framework to analyze individual companies:

  1. First, we look at the company’s foundation, i.e. it’s financial health and stability are evaluated. We do this by looking at debt/equity ratio and current or quick ratios.

  2. Second, we look at the company’s growth and profitability.
    Specifically, we analyze it’s revenue and net income as well as it’s profits in relation to investments, e.g. by looking at return on assets, return on equity or free cash flow.

  3. Third, we look at the stock performance and analyze fundamental ratios and KPIs, such as the price-to-book ratio or the graham number.

This industry-focused article, however, concentrates on the second and third layer of our fundamental framework. Hence, in the following we will explore growth and profitability as well as stock performance of the top 5 chemical and pharma stocks to invest.

The first layer, the companies’ financial health and stability, will be explored in separate, company-focused articles.

4.1 Coloplast company analysis

Growth and profitability

A company can grow organically in either of two ways: increasing the units sold or increasing the price per unit sold. Of course, a company can also grow inorganically by acquiring other companies.

Within the past ten years, Coloplast has continuously been increasing its revenues (CAGR of 7% 2008-2018) reaching approx. 17 DKK BN in 2018.

Similarly, its net income has constantly been increasing and doubling within the past seven years, reaching approx. 9 DKK BN in 2018. This is a net income margin of about 23%. Though its positive performance within the past decade, the company has experienced a sharp drop in net income in 2015 (-63% yoy).

This was only to due to the occurrence of so-called special items, i.e. significant provisions (of about 3 DKK BN) to cover potential claims, settlements, and other costs arising in connection with a lawsuit in the US.

In terms of revenue and net income development, Coloplast has delivered stable and continuous growth. Growth, however, is only half the truth of a company being eligible for investment.

Profitability, is the other and equally important truth! Therefore, let’s look at return on equity (ROE). Coloplast’s current ROE is about 70%, which is quite high. The reason for such a high ROE might be either of the two following points, or a mixture:

  • Coloplast manages its equity in relation to its net income very well, i.e. it generates stable and growing profit and keeps equity at a rather low but sufficient level to support its business
  • Coloplast has recently taken measures that artificially inflate its ROE. This was the case since the company announced and conducted a share buy-back program in early/ mid 2018. These share buy-backs of reduce equity with in turn raises ROE

Stock analysis

When you want to assess a company’s stock performance or current standing, always use a number of different ratios and techniques.

Let’s start with one of the most basic indicators: current dividend yield, which is about 2.2% for Coloplast. 2.2% is a quite decent yield, at least slightly above the inflation target of about two percent for the US as well as Germany.

As a long-term oriented investor, you could accept such a return since it is sustainable and delivered by a financially sound and growing company. Yet, it is clearly below the other chemical and pharma stocks’ dividend yields.

Looking at the historic development, Coloplast has even been increasing its dividend payouts over the past five years. This is in line with the company’s favorable historical development in terms of growth and profitability, which has been shared with investors.

However, when trying to project Coloplast’s dividend payouts, we must consider its current dividend payout ratio (DPR). Coloplast’s current dividend payout ratio is at about 90%, which is already very high. There are two things to consider:

  • On the one hand, a high DPR is quite favorable for investors since the company is distributing most of its profit to its investors.
  • On the other hand, the higher the DPR the less money is left within the firm for reserving or future investments. Also, it makes it difficult to increase DPR in the upcoming years.

However, overall it is not the DPR that determines an investor’s return but rather the dividend yield. Thus, there is no value in having a high DPR but low dividend yield but rather vice versa. You are best of with a sustainable investments when a company has a low DPR and a high dividend yield.

Looking at dividends per share (DPS), Coloplast shows quite an interesting development. Having started with only 1.8 DKK per share in 2008, the company pays 16 DKK per share ten years later.

This is an almost tenfold increase in DPS within a decade. Again, having completed several share buy-back programs within the past few years (e.g. in 2016 and 2018) the sharp increase in DPS has to be treated with caution. This is because the total number of outstanding shares was reduced – and DPS simultaneously increased – when shares were bought back.

Similar to DPS, earnings per share (EPS) follow the same mechanics. Less shares outstanding increase EPS with constant earnings.
Coloplast’s EPS in 2018 were about 18 DKK and have constantly grown within the past decade with one exception. There was a sharp drop in 2015 following a decline in net income in the same year.
Since EPS similar to net income have continuously been growing we can infer the following, Overall, the increase in earnings and not a decrease in shares outstanding has driven the rise in EPS.

4.2 Novo-Nordisk company analysis

Growth and profitability

Another Danish company, Novo-Nordisk has also been showing continuous revenue growth within the past decade (CAGR 9%). Compared to the Coloplast, Novo-Nordisk is about seven times bigger in terms of revenues.

But, after having achieved steady revenue growth from 2008-2014 (CAGR 12%) it has been flattened recently (CAGR 1% from 2015-2018). According to the firm, this was due to increasing competition (from generic drugs) and lower realized prices.

Similar to revenues, net income has been experiencing hampered growth recently (CAGR 3% from 2015-2018), compared to a stronger one from 2008-2014 (CAGR 18%). Though having been slightly reduced, revenues and net income have been showing a continuous and steady growth trajectory within the past ten years.

Novo-Nordisk’s ROE is about 80%, which is again quite high. This might be due to the following reasons:

  • Novo-Nordisk announced a share buy-back program in early 2018. As a result, equity is reduced and therefore, ROE simultaneously increased
  • Novo-Nordisk significantly increased its debt in 2017 after it sharply dropped the year before. All else equal, higher debt leads to a reduction in equity that eventually rises ROE

Though in the first place, such a high ROE number seems to be favorable, we have to be cautious in light of recent debt and equity movements.

 

Stock analysis

Novo-Nordisk’s current dividend yield is about 2.6%. This means, if you had one stock of this company, you would get an annual return of 2.6%. Compared to the other stocks analyzed in this article, this is in the lower end.

However, you should not look at a company’s dividend yield detached from other ratios or indicators. Therefore, we also consider the company’s dividend development. Specifically, whether Novo-Nordisk has been constantly increasing its dividend or not.

By taking a closer look we see that within the past five years, Novo-Nordisk’s dividend did not increase yoy. Its paid-out dividend decreased most significantly from 2013-14 as well as from 2014 to 2015 and from 2016 to 2017.

At the same time, Novo-Nordisk has a more conservative DPR than Coloplast, i.e. about 50%. This DPR can be viewed as quite realistic and flexible. This is because the company can easily adjust either upwards or downwards and thus, support different strategies.

You as a (potential) Novo-Nordisk investor should not be too worried about this DPR. There is not only enough leeway to increase further payouts but also to increase financial buffer.

Novo-Nordisk’s most recent EPS was about 15 DKK, having constantly been growing over the past decade.

This EPS development is in line with Novo-Nordisk’s profit development: having experienced a continuous growth over the past ten years and thus, pushing EPS upwards.

4.3 Lyondellbasell Industries company analysis

Growth and profitabilty

Lyondellbasell’s revenues have been showing a rather unsteady trajectory within the past decade. It has suffered from the financial crisis after which the company’s revenues dropped in 2009. Subsequently, Lyondellbasell emerged from chapter 11 bankruptcy (i.e. a reorganization) in 2010.

Thereafter, revenues slightly increased/ stayed flat before they dropped in 2015 and 2016. The quite frequent changes in Lyondellbasell’s revenues stem from the fact that its business and performance is closely tied to crude oil prices. When crude oil is expensive, Lyondellbasell’s products are expensive and when crude oil is cheap, the company’s products are becoming cheaper as well.

Decreasing crude oil prices let Lyondellbasell’s revenues shrink. However, though revenues have declined at some points, net income has continuously been increasing since 2011 (CAGR 12% 2011-18).

This is because petrochemical manufacturers such as Lyondellbasell can generate extra margin before crude oil cost decreases are passed on to customers.

Overall, fluctuating revenues are largely due to fluctuating costs of raw material such as crude oil. These fluctuations are, however, not necessarily pulled through net income since other items of the P&L statement are not affected by these fluctuations.

Lyondellbasell’s ROE is with about 65% high but not as high as those of Coloplast or Novo-Nordisk. In the first place, you as an investor supposedly appreciate this rather high number as it is a sign that Lyondellbasell positively manages your equity stake and generates decent returns out of it.

However, looking at Lyondellbasell’s history of share buy-backs, the ROE might have to be challenged. Since 2013, the company has continuously been buying shares back from market participants. The buybacks reached its high in 2014, amounting to about 5.9 USD BN.

Within the same period Lyondellbasell’s debt-to-equity ratio increased peaking in at the end of 2016. Thus, we can infer that the company’s buy-back programs were at least partially financed by debt.

Overall, the high ROE can partially be explained by the net income, which has been rising over the past few years. Additionally, increased debt and the significant share buy-backs recently pushed ROE upwards.

Stock analysis

Lyondellbasell’s current dividend yield is about 4.2%, which is almost twice the one of Coloplast. A dividend yield of more than four percent is already quite high and offers a good annual return.

Image you held 2,000 USD worth Lyondellbasell stocks, you would get an annual return of 84 USD (i.e. 4.2%) before tax. In addition to the high dividend yield, Lyondellbasell’s dividend has been increasing over the past five years.

This means that the company has been increasing its paid-out dividend continuously over the past five years. Of course, investors implicitly expect a company to increase its dividend year over year, but at the same time the company must be able to stem these measures.

Looking at Lyondellbasell’s dividend payout ratio (DPR) it becomes clear that the company still has quite some leeway to further increase its dividends. Lyondellbasell’s current dividend payout ratio is about 37%, which is quite favorable.

  • First, the lower the DPR the larger is the upward potential for future dividend payouts. Also, there is more money left for reserving.
  • Second, in combination with a high dividend yield, a low DPR is the best possible situation for you as an investor. You are getting a good return and now that the company still has sufficient money to put aside.

Earnings per share (EPS) of Lyondellbasell are about 12 USD. Except for a small dip from 2017 to 2016, the company’s EPS has constantly – and in line with its net income – been growing over the past few years.

4.4 Pfizer company analysis

Growth and profitability

Pfizer’s revenues have been growing over the past four years (CAGR 2% 2015-18) after there has been a gradual decrease from their peak in 2010. In 2017, Pfizer generated 53 USD BN revenues. At its peak Pfizer accounted for 68 USD BN in revenues that, however, decreased since its best-selling drug Lipitor lost patent protection in 2011.

Pfizer’s net income was even more severely hit by its patent expirations as well as higher research and legal expenditures decreased profit. Though revenues rose after 2015 again, net income continued to struggle and stay low until one year later.

Only recently, in 2017, it experienced a significant increase that was mainly due to above expectations sales of its blockbuster pneumonia vaccine Prevnar.

Return-on-equity (ROE) of Pfizer is about 33%, which is not extraordinarily high although the company announced a 10 USD BN stock buy-back program end 2017. Pfizer has decreased its total debt from 2016 to 2017 by about 10%, however, this does not suffice to keep that low.

Stock analysis

Pfizer’s current dividend yield is about 2.9%, which is about one percentage point lower than the one of Lyondellbasell. However, it is still higher than the dividend yield of Coloplast and Novo-Nordisk.

Although Pfizer’s dividend has been increasing throughout the past five years, its dividend payout ratio (DPR) is with about 78% quite high.

The ideal situation is when a company provides a high dividend yield with a rather low DPR. With that, you as an investor are fully satisfied:

  • You are getting a decent return on your investment. This means, ideally a dividend yield above two or three percent
  • You can be sure that the company is you are invested in is putting aside/ reserving an adequate amount of money

Therefore, the rather high dividend payout ratio of Pfizer is not ideal although the dividend yield is acceptable. Key will be to observe Pfizer’s dividend payout ratio in the upcoming years.

Pfizer’s earnings-per-share (EPS) naturally follow the same pattern as its net income:

  • A peak in 2013
  • Three very low years follow
  • A recovery in 2017 when EPS top those of 2013 at about 3.50 USD per share

4.5 AbbVie company analysis

Growth and profitability

AbbVie’s revenues have been growing over the past nine years (CAGR 8%) and reached 28 USD BN in 2018.

However, its net income experienced quite a severe drop from 2012 to 2014 (-67%), which was mainly due to foreign currency volatilities and significant expenses related to the terminated acquisition of Shire Plc. Most recently, AbbVie’s profit has greatly recovered from that drop and reached about 5.3 USD BN in 2017 again.

AbbVie’s return-on-equity (ROE) is about 109%. A ROE above 100% means that a company’s net income is larger than its equity, which is the case for AbbVie. To be exact, whilst AbbVie’s net income was about 5.3 USD BN its total shareholder’s equity was only about 5.1 USD BN.

Such a high ROE is rather suspicious at a first glance. There are several reasons for such a high ROE:

  • Comparatively low equity due to historical losses that had to balanced out with the company’s equity buffer
  • Comparatively low equity due to excessive debt that has been taken on in the past
  • Extraordinarily high net income

AbbVie’s total debt as well as its total equity rose significantly from 2014-17 (i.e. +153% and +200% respectively), whilst its net income stayed relatively flat after the big rise from 2014 to 2015. Nevertheless, we should closely watch this development in future.

 

Stock analysis

AbbVie’s current dividend yield is similar to the one from Pfizer, namely about 2.9%. Again, this is a decent dividend yield above the inflation target of 2% of for example the US or Germany. In addition, AbbVie’s dividend has been increasing throughout the past five years.

However, the dividend payout ratio (DPR) of AbbVie has at the same time been quite high, with currently about 60%. This means that 60 cents out of each dollar in net income is paid on dividends to investors.

As a long-term oriented investor, you would prefer that the companies you are having a stake in to have a low DPR with a high dividend yield. In that case, a company would be to reserve some money for the future whilst at the same time delivering a good yield for its stakeholders.

AbbVie’s earnings-per-share (EPS) were 3.3 USD in 2017. Its EPS development has naturally be in line with its net income, which is why there was a drop in 2014 with a fast recovery in the subsequent years.

5. Conclusion

Maybe you have already heard of one of those five companies and considered investing in them. Maybe not.

In any case, now you know the very basics about those two industries. You know which are the top 5 stocks to invest in the chemical and pharma industries. You know why they are a good investment for you as a long-term oriented value investor.

Let us know if you have already had any experience with these companies, if you enjoyed reading the article, or if you would like to learn anything else!

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