AbbVie (ABBV 2.86%) ranks as one of the biggest pharmaceutical stocks on the market. But it's still a lot smaller than Merck (MRK 0.17%). Bigger has proven to be better this year, with AbbVie's stock performance trailing well behind Merck's.
But which of these pharma stocks is the better pick for long-term investors looking ahead? Here's how AbbVie and Merck compare on several key fronts.
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Growth prospects
Wall Street thinks that Merck's growth prospects look better than AbbVie's over the next five years. Analysts project that Merck will grow its earnings by an average of nearly 10% annually while AbbVie's earnings will increase by less than 4% annually. How accurate those estimates will actually be remains to be seen, but there are certainly some good reasons to believe that Wall Street is right in going with Merck instead of AbbVie when it comes to growth.
AbbVie's top-selling drug, Humira, already faces biosimilar competition in Europe that's quickly eroding revenue. Humira will battle biosimilars in the much larger U.S. market starting in 2023. That's when the blockbuster drug's sales declines will really become ugly.
The good news is that AbbVie has several products that should help offset the sinking sales for Humira. Cancer drugs Imbruvica and Venclexta should continue to pick up momentum. AbbVie's new immunology drugs Rinvoq and Skyrizi are likely to be huge winners. The company should also reduce its dependence on Humira with its pending acquisition of Allergan. However, analysts think Allergan's growth prospects are even lower than AbbVie's, so the deal probably won't work miracles for AbbVie's growth story.
Meanwhile, Merck claims the cancer immunotherapy that's likely to knock Humira out of the No. 1 spot among the world's biggest blockbuster drugs -- Keytruda. This one drug should drive most of Merck's growth over the next several years. However, Merck also has other products with rising sales, including its Gardasil HPV vaccine and neuromuscular block reversal drug Bridion.
Dividends
Merck claims a solid dividend that currently yields more than 2.7%. The drugmaker has increased its dividend each year since 2011 for a total boost of nearly 61%. With rising revenue and earnings, Merck should be in great shape to provide additional dividend hikes in the future.
But it's hard to beat AbbVie when it comes to dividends. The company's dividend yield stands at 5.4%. AbbVie has increased its dividend for a remarkable 47 years in a row including the time that it was part of Abbott Labs. Since being spun off from Abbott in 2013, AbbVie's dividend payout has soared by 195%.
Could the Allergan acquisition jeopardize AbbVie's terrific dividend? Probably not. Allergan currently pays a dividend of its own that yields around 1.6%. AbbVie CEO Rick Gonzalez stated in the company's third-quarter conference call that AbbVie is "committed to a strong and growing dividend" after the Allergan deal closes.
Valuation
Determining which of these two big pharma stocks claims the more attractive valuation isn't as easy as it might seem. Merck's price-to-earnings (P/E) ratio of 25 is a lot lower than AbbVie's P/E ratio of 40. But using multiples based on previous earnings doesn't tell the full story.
If we look at near-term earnings growth, AbbVie is a lot cheaper than Merck. AbbVie's shares trade at only nine times expected earnings compared to Merck's forward earnings multiple of 16. So is AbbVie the better bargain? Not necessarily.
Remember that Wall Street thinks that Merck will deliver much stronger earnings growth over the next five years than AbbVie will -- and that view is probably right. Factoring longer-term growth into the picture, Merck's valuation is more attractive than AbbVie's is.
Better buy
Which of these stocks is the better pick? I think it depends on your priorities.
If you're an income-seeking investor looking mainly for juicy dividends, my view is to go with AbbVie. I expect AbbVie's dividend will continue to grow for a long time to come.
On the other hand, if your focus is on total return, Merck is probably the better stock to buy right now. Keytruda is on a roll that isn't likely to slow anytime soon. Merck's growth won't necessarily be awe-inspiring, but it should be solid. And combined with its dividend, Merck should be able to outperform the broader market.
