Hikma Pharmaceuticals (LSE: HIK) looks like a potentially a strong passive income stock. Its price is down 22% over the past year, as operational challenges forced management to revise earnings expectations. Several factors drove the drop, most notably the delayed launch of a recently-acquired facility in Bedford, Ohio.
As a result, full operational efficiency has been pushed back to late 2027, with commercial revenue benefits now only arriving in 2028. So the question is, does today’s depressed price present an opportunity — or a value trap?
Valuation assessment
The falling price means Hikma now looks attractively undervalued, with a price-to-earnings (P/E) ratio of only 9.3. Add to this an above-average dividend yield of 4.1%, and the stock exhibits both income and value potential.
But the Bedford delay is just the tip of an iceberg, adding to a swathe of other issues. From guidance cuts and currency headwinds to higher costs amid US pricing pressure, Hikma has its work cut out if it hopes to recover.
Management’s therefore pursuing a multi-year turnaround strategy but results may take some time to materialise.
My verdict?
Hikma may look cheap but I think it could still get cheaper. Investors buying now may find themselves underwater for another year or more. So when it comes to passive income, I think there are better options on the FTSE 100.
One I think is worth considering right now is Admiral Group (LSE: ADM). It’s down 17% from its 2025 high, leaving it with a relatively attractive forward P/E ratio of 12.7. What’s more, it’s estimated to be trading at 49% below fair value, using a discounted cash flow (DCF) model.
But its income potential is the real story. With a yield of 7.7% and over two decades of uninterrupted payments, it’s a dividend star. Earnings have compounded at an annualised rate of 30% over the past three years and its return on equity (ROE) is an eye-watering 65.4%.
Admittedly, its average 12-month price target growth of 14% is much lower than Hikma’s 40%, but the income reliability makes it the preferable choice, in my book.
It’s not a guaranteed payday though. As with any stock, there are risks. Recent earnings were temporarily inflated due to prior period reserve releases, essentially the result of cautious estimates from past years proving less costly than expected.
These are one-time accounting gains, not recurring profits. When these reserve releases dry up (as they inevitably do when markets normalise), reported earnings could drop sharply.
The bottom line
When looking closer, Hikma’s discount price may not be the best value opportunity today. While it’s still got strong recovery potential, it could be a while before investors see the benefit.
Admiral, on the other hand, while still carrying some valuation risk, has far stronger income potential. For long-term investors eyeing passive income, I think it’s a better stock to consider today.
But it’s not the only one. If you’re worried about the impact of global rate changes, stocks such as Unilever and National Grid have both defensive and income qualities.
As always, a highly-diversified portfolio offers the best chance to ride out volatility while still targeting reliable returns.
