Which industry comes to mind first when you think about high dividend yields? My guess is that biotech wasn't at the top of the list. However, there are some surprisingly strong dividends in biotech. PDL BioPharma (NAS: PDLI) , for example, boasts a current dividend yield of 8.2%. Could this be the best dividend in biotech? Let's take a look.
When it comes to raw dividend yield, PDL BioPharma runs far ahead of other strong biotech dividend stocks.
Bristol-Myers Squibb (NYS: BMY)
GlaxoSmithKline (NYS: GSK)
Eli Lilly (NYS: LLY)
Merck (NYS: MRK)
Source: Yahoo! Finance.
While the other biotech stocks offer attractive yields, most of them are barely over half that of PDL. Only GlaxoSmithKline jumps out of the pack, and its dividend yield still trails significantly behind PDL's.
Investors can't just look at the yield, though. Payout ratio is also important. This ratio divides the dividend by net income. Companies that have lower payout ratios generally have a better ability to continue paying dividends.
PDL wins in this category also. Lilly comes in at a relatively close second. However, Bristol's and Warner Chilcott's payout ratios come in much higher than dividend investors typically prefer.
With a a terrific dividend yield and a good payout ratio, should you rush to buy PDL BioPharma? Foolish investors know that we don't buy numbers; we buy businesses. Understanding PDL's business helps us to make a more informed decision.
The company at this point is essentially an intellectual property asset manager. PDL pioneered technology for creating humanized antibodies but divested its commercial, cardiovascular, and research and development operations in 2008. It now has less than ten employees.
PDL received 95% of its revenue in the most recent quarter from royalties derived from four products: Avastin, Herceptin, Lucentis, and Tysabri. The first three products are licensed by Genentech, which is owned by Swiss drugmaker Roche, while Tysabri is licensed by Elan.
One huge problem lies ahead of PDL. Its main revenue-generating patents expire beginning in 2013, with the last expiration at the end of 2014. This isn't just a patent cliff. It's a patent Grand Canyon.
CEO John McLaughlin is quite straightforward in saying that without other assets, PDL won't be able to continue paying dividends after the patents expire and therefore won't be able to continue operations. However, he also has listened to shareholders who want the company to find other assets that could generate sufficient revenue to keep paying the strong dividend.
The company announced a few actions over recent months that it hopes will provide new revenue. In July, PDL entered into a $55 million credit agreement with Merus Labs. In October, it acquired royalties on several products from Axogen. A few weeks ago, PDL loaned $40 million to Wellstat Diagnostics, a maker of point-of-care diagnostic systems.
Can PDL BioPharma continue paying its strong dividends? It's too soon to know for sure. The company is continuing to evaluate other potential transactions that could generate revenue, but much more progress is needed to offset the loss of royalties from its main licensed products. If it fails to replace the revenue, the likelihood is that the company will end operations by 2016.
Is this the best biotech dividend stock? Yes and no. Yes -- PDL currently pays by far the best dividend with the lowest payout ratio of any biotech company. But the answer is also "no." A company that could realistically go out of business within four years doesn't have the staying power that investors want in dividend stocks.
The numbers look great. The business has been good. But the fast-approaching canyon is huge. My view is that too many questions remain unanswered to buy PDL BioPharma for now.
While PDL's future may be uncertain, Merck is a pharma dividend stock that appears to be solid. For nearly 100 years, Merck's cutting-edge research has led to a number of medical breakthroughs. However, this pharma stalwart is facing a number of significant challenges. Will Merck crumble under its own weight, or will it continue to pay dividends to investors for another century?
To find out if this pharma giant has the stamina to keep its Bunsen burners alight, grab your copy of our brand new premium research report today. Our senior biotech analyst Brian Orelli, Ph.D., walks you through both the opportunities and threats facing Merck, and the report comes with a full 12 months of updates. Claim your copy now by clicking here.
The article Is This the Best Dividend in Biotech? originally appeared on Fool.com.
Fool contributor Keith Speights has no positions in the stocks mentioned above. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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