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The potential for a worldwide recession caused the S&P 500 index to enter a bear market on May 20. But not all equities have performed badly.

The diversified pharmaceutical stocks Merck (MRK +23%) and Johnson & Johnson (JNJ +5%) have appreciated by 23% and 5%, respectively, this year. The two equities appear to be good long-term buys at the moment, based on their valuations.

1. Merck

Merck’s market capitalization of $233 billion places it among the world’s top five pharmaceutical companies. The firm has a strong drug pipeline and portfolio that should serve it well in the future.

In 2021, Merck had five blockbusters on the market, including the best-selling cancer medicine in the world, Keytruda. And its animal health business grew by double digits for the year. Lagevrio is a blockbuster COVID-19 antiviral medication that generated $3.2 billion in net sales in the first quarter of 2022.

Merck also has a higher dividend yield, at 2.9 percent. In fact, that’s more than double the 1.6% yield of the S&P 500.

The dividend appears secure, and it should be able to expand at a similar rate as earnings. This is why I’m anticipating high single-digit yearly dividend growth, making the stock a good mix of income and growth potential.

2. Johnson & Johnson

Johnson & Johnson’s $458 billion market value makes it the globe’s largest pharmaceutical firm. Its roster of 14 blockbusters in 2021 included Stelara, cancer drug Darzalex, and the COVID-19 vaccine, among others. Aside from a strong product line, J&J has an equally impressive pipeline of pharmaceuticals.

This is emphasized by the fact that as of April, J&J had 84 clinical trials in progress for oncology, immunology, and neuroscience treatment areas. J&J’s strong product line should propel revenue growth in the near term, while the pipeline should fuel long-term expansion. This is why Wall Street analysts are predicting 5% annual earnings growth over the next five years for J&J.

J&J’s dividend payout ratio is expected to be 44% in 2022, implying that dividends can be raised somewhat ahead of earnings. That’s why I’m anticipating a modest rise in the dividend, similar to the 6.6 percent boost announced last month. This is a good combination of starting yield and growth potential, given the market-topping 2.5 percent dividend yield.

Author: Blake Ambrose

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