In the wake of a remarkable surge of approximately 51% in the S&P 500 index since late 2022, fueled by the burgeoning excitement surrounding artificial intelligence, many investors are now questioning the sustainability of this upward momentum. Recent data reveals that the index is currently trading at a cyclically adjusted price-to-earnings (CAPE) ratio of around 35.2, a figure reminiscent of valuations just prior to significant market corrections in history.
This soaring CAPE ratio has only exceeded 35 in two other instances over the past four decades: during the late 1990s dot-com bubble and just before the market’s steep decline in 2022. While such high price-to-earnings multiples do not definitively predict an imminent market crash, they do suggest that an index tracking fund may struggle to deliver impressive returns in the coming years.
While the S&P 500 approaches historic highs, some undervalued stocks warrant attention for potential superior performance in the long term. Specifically, Pfizer (NYSE: PFE) and AbbVie (NYSE: ABBV) both present compelling investment cases with dividend yields exceeding 3%. Here’s a closer look at why investors might consider these pharmaceutical giants for their portfolios.
First up is Pfizer, a pharmaceutical leader currently offering an attractive dividend yield of 5.8%. Having raised its dividend for the 15th consecutive year, Pfizer is positioned to provide substantial passive income for shareholders, even without further increases in payout. The company has recently made headlines for its strategic acquisition of Seagen, a firm specializing in cancer therapies, which is projected to significantly boost Pfizer’s sales.
As of 2023, sales from Seagen’s cancer treatments have jumped from an annualized $2.6 billion to $3.3 billion under Pfizer’s stewardship, with expectations for that figure to exceed $10 billion by 2030. Moreover, the company’s extensive pipeline, featuring 65 experimental medicines in various stages of testing, underscores its potential for continued growth amidst the backdrop of declining sales from aging products.
On the other hand, AbbVie, while facing short-term challenges due to declining sales from its former blockbuster drug Humira, presents a unique investment opportunity. Humira’s patent expiration has impacted sales, dropping them markedly from $21.2 billion in 2022 to an annualized $11.3 billion recently. However, this dip is not a reflection of the company’s overall potential. AbbVie has invested wisely in subsequent product development, and sales from its new offerings, including Skyrizi and Rinvoq, are gaining momentum and are expected to reach upwards of $27 billion collectively by 2027.
AbbVie also boasts a solid dividend yield of 3.2%. The company’s commitment to innovation and expansion within its product line, along with established brands like Botox, positions it for a robust recovery and growth trajectory.
Both Pfizer and AbbVie are trading at reasonable price multiples—11 times forward earnings for Pfizer and around 17.9 times for AbbVie. This suggests that they may not only weather economic fluctuations but could also outperform the S&P 500 in the upcoming decade.
That said, potential investors should assess their individual investment goals and risk tolerance before diving into these stocks. While the Motley Fool’s analysis indicates promising avenues, it’s crucial to conduct thorough research and consider a diversified approach for long-term success.
For savvy investors looking to enhance their portfolios, positioning in high-yield dividend stocks like Pfizer and AbbVie may prove to be a wise strategy, especially in this climate where traditional growth stocks face significant valuation restructuring. These established pharmaceutical firms, with substantial momentum and reliable dividend histories, could indeed be key players in outperforming broader market indices in the years to come.