Why Bristol-Myers Is Worth a Look

By Douglas Ehrman - November 28, 2012 | Tickers: BMY, JNJ, PFE | 0 Comments

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From time to time, investors get fixated on a given company and romanticize every piece of news to fit their particular predilection on the stock. I have been bullish on Bristol-Myers Squibb (NYSE: BMY) since mid-August, noting that every success the company registers is ignored, but every misstep is severely punished. While the stock is up about 2.5% since I first commented on it, I can admit that my assessment was either wrong or early (also code for wrong). A hallmark of successful investing, however, is being able to shed past mistakes and look to the future. Based on ongoing strength, Bristol-Myers remains an absolute must for your core portfolio.

Another Silent Celebration

As has been the case for the last several months, the company recently registered an important victory that was all but ignored by the market. Eliquis, an atrial fibrillation treating blood thinner developed in cooperation with Pfizer (NYSE: PFE), was recently approved for sale in Europe. While overseas approvals do not garner the type of attention or market reaction that U.S. approval triggers, the news is significant. Eliquis, which is likely to be approved in 2013 for U.S. sale, is considered to be the next blockbuster for both Bristol-Myers and Pfizer; it will compete with both Boehringer Ingelheim’s Pradaxa and Johnson & Johnson’s (NYSE: JNJ) Xarelto. J&J and others are all battling for dominance in this important market segment.

There is no doubt that the approval was well anticipated, but there is little evidence that the news has been priced into the stock at any point. While revenues generated by the drug will be split with Pfizer, this is another instance of a potentially positive catalyst receiving a yawn from the market. Ultimately, I believe that the stock will pop on the U.S. approval, meaning that at current levels the stock can be considered a value.

The Dividend Question

As a part of the automatic tax hikes set to go into effect as a result of the fiscal cliff, in 2013 dividend income will revert to being treated as ordinary income, losing the 15% tax rate that has made dividend stocks popular. A recent report by Reuters identifies this as an area of selling pressure: “Another sell spot: dividend-paying stocks, which have become more popular on Wall Street as the yield on 10-year U.S. Treasuries has fallen below 2 percent. They will no longer be the deal that they once were, said Mike Piershale, head of Chicago-based Piershale Financial Group, who has been selling some positions in dividend stocks.”

Companies have correctly identified this phenomenon and adjusted their dividend policy accordingly, attracting investment dollars by offering a yield alternative to beleaguered fixed income vehicles. Bristol-Myers currently carries a dividend yield of 4.2%, which has supplemented its appeal, even as the price level has been essentially flat. While a tax hike of as much as 25% -- the spread between the current 15% level and the new top tax bracket that will pay just under 40% in taxes -- the company will still carry a yield over 3%. While the reduction is severe and one of the most ill-conceived ways to benefit the economy on record, Bristol-Myers will remain well positioned even if Congress continues to fail at finding a reasonable solution.

The Trade

Heading into the holiday season, the market has presented you with another gift on inaction by failing to see the Eliquis news as important. Shares of Bristol-Myers continue to be extremely attractive at current levels for the long term. Even if shares remain range-bound and the fiscal cliff results in a massive tax hike on dividend income, the company’s dividend yield is sufficient to still provide a very attractive income element. For each of these reasons, the stock belongs in your core portfolio.

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