A couple months ago I highlighted Endo International (NASDAQ: ENDP) and Jazz Pharmaceuticals (NASDAQ: JAZZ) as potential buyout targets. That’s still the case, and both are up between 3.5% and 4% since then, versus flat performance for the S&P 500.pharma-buyout

However, today’s focus is on bigger players being forced into partaking in the pharma buyout craze. This comes as their growth is in decline thanks to more competition and patent expirations.

We could just be getting started with major merger and acquisition deals in the pharmaceutical industry, which is hard to believe since things have been red hot over the last six months or so. Consider this: Of all the M&A deals over the last two quarters, 20% have been related to the drug industry, which is the first time in over 13 years this has happened.

Already this week, we saw Mylan (NASDAQ: MYL) reject a bid from Teva Pharmaceuticals (NYSE: TEVA) that’s close to 15% higher than where it’s currently trading. Instead, it’s decided to pursue its own acquisition, focusing on its offer for Perrigo Company (NASDAQ: PRGO).

The M&A market in pharma remains strong due to the cheap financing that comes from low interest rates. But the real focus is on when a larger player like Merck & Co. (NYSE: MRK), Eli Lilly (NYSE: LLY) or Pfizer (NYSE: PFE) will make a big splash in the market.

The key is that all three of these major drug makers are expected to grow earnings at an annualized rate for the next five years of at or below 5%. That’s a fraction of the growth that the likes of Jazz Pharmaceuticals will see over the next half decade.

But have no fear. These mega-caps have tons of cash they can use to buy growth. The best positioned looks to be Pfizer.

With a near $220 billion market cap, it’s a giant in the space. But with that massive market cap comes a large cash hoard. It has over $36 billion in cash, which is almost enough to cover its entire debt load.

Pfizer pays the highest dividend yield of the biggest pharma companies, at 3.3%. And it’s reasonably priced. It trades at a price-to-earnings ratio (based on next year’s earnings estimates) of 15, which is in line with peers.

With Pfizer generating over $15 billion a year in free cash, look for it to not settle for a sub-5% return on earnings. It’s already in the process of buying up Hospira for $16 billion, which likely isn’t fully built into earnings expectations.

But it could certainly use more, as it’s hard to move the needle when you’re Pfizer’s size. It’s not out of the question for Pfizer to make another play for the $90 billion market cap AstraZeneca (NYSE: AZN).

AstraZeneca rejected a bid from Pfizer nearly a year ago, but since then shares of AstraZeneca are negative. In the meantime, it’s still managing to grow its revenues and earnings because of its steady pipeline of new products.

There’s even talk that the purchase of Hospira could be a move to set the pharma giant up for a split. In that scenario it would separate itself into a steady products business and another company that’s focused on more innovative pharma.

There appears to be a number of levers for Pfizer to pull that could enhance shareholder value, which is rare for a $200 billion-plus market cap company.

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Published by Wyatt Investment Research at