2 Undervalued, High-Quality Companies to Buy Now and Hold Forever

Pfizer (NYSE: PFE) and Bristol Myers Squibb (NYSE: BMY) are two of the largest and most respected pharmaceutical companies in the world. If you are looking to buy high-quality companies, they should be on the short list in the healthcare sector. And they both happen to look undervalued right now, opening up an opportunity for buy-and-hold investors.

Although they both face a similar headwind today, Pfizer and Bristol Myers Squibb have demonstrated that they can effectively address the challenges they encounter. Here's a look at each one of these drug stocks and their lofty dividend yields.

1. Pfizer has the riskier dividend

What income investors will probably find most attractive about Pfizer is its lofty 6.7% dividend yield. There's just one small problem with that yield. It is backed by a trailing 12-month dividend payout ratio that is hovering around 100%. And a recently announced, multibillion-dollar acquisition could put added financial pressure on the company and the dividend it pays.

However, that acquisition is a net positive because it demonstrates that Pfizer can and will take the necessary steps to get its business back on track. Part of the reason Pfizer's yield is so high is that it is facing a patent cliff, which is when blockbuster drugs lose patent protection and face generic competition. Revenue tends to decline after a drug loses patent protections. Pfizer's patent situation isn't great, but it is a fairly normal situation for pharmaceutical companies.

History shows that Pfizer knows how to deal with patent cliffs. The pending acquisition of Metsera and its obesity drug candidates show the company is already taking decisive action. While the lofty payout ratio is a risk, if you view Pfizer as a value stock rather than a dividend stock, it appears that now could be a good time to buy it. Notably, the stock's price-to-sales and price-to-book value ratios are both below their five-year averages. If the dividend survives, it's icing on the cake.

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2. Bristol Myers Squibb's dividend looks safer

Bristol Myers Squibb's payout ratio is currently a little over 80%. There's some risk that comes with the well-above-market 5% dividend yield, but not as much as accompanies Pfizer's dividend. If you are focused on dividends, Bristol Myers Squibb is probably a more attractive opportunity.

Like Pfizer, Bristol Myers Squibb is facing down a patent cliff. And like Pfizer, Bristol Myers Squibb has demonstrated over time that it can effectively handle such situations. This time around, the pharmaceutical giant is working on novel drugs in the bispecific immunotherapy space. If things go well, it could be a first move in this emerging cancer treatment approach. In other words, there's a potential catalyst that could quickly get investors excited about Bristol Myers Squibb again. While leverage is slightly elevated following the acquisition of Celgene, the company has already begun reducing its leverage, and this probably shouldn't be a deal-breaker, even for conservative investors.

Currently, however, the stock's price-to-sales ratio is below its five-year average, and the dividend yield is at the high end of its historical yield range, suggesting investors are getting a bargain price.

Pfizer and Bristol Myers Squibb aren't going anywhere

The big story here, however, is that these two healthcare stocks produce valuable products that will remain in high demand for years to come. Those products may change over time, highlighted by the near-term concern of patent cliffs, but both Pfizer and Bristol Myers Squibb have repeatedly demonstrated that they possess the research capabilities to thrive in the long term. If you are looking for buy-and-hold stocks and don't mind stepping in while others are fearful, both could easily find a home in your portfolio today.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.