This Healthcare Giant Offers a Very Sustainable Yield of Above 4%
Dr. Osman is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Bristol-Myers Squibb (NYSE: BMY) is a globally engaged biopharmaceutical company researching, developing and selling products. The company’s latest sales figures are worth $21.24 billion. Bristol-Myers have been one of top dividend payers in the market. Most recently the company paid 34 cents per quarter to each shareholder. Based on this latest dividend amount, the projected yield is has reached above 4%. So far in 2012, the company paid about $2.2 billion in dividends. While its payout ratio based on earnings surpassed the 100% benchmark, that should not deceive the investors. In fact, Bristol Myers generated about $7.6 billion in operating cash flows, which is more than enough to pay the current yield. Based on the latest figures, the stocks yield on cash flow is less than 30%.
Recent Events
Formed in 1888, the company most recently had its flagship drug ‘Eliquis’ cleared by the European Union. The drug, formed in partnership with Pfizer, helps prevent strokes and systemic embolism. Furthermore, the company was also granted approval for ‘Forxiga’, which treats diabetes. Bristol-Myers announced that it will be eliminating all sales and representative positions related to its schizophrenia drug ‘Ablify’, since the partner company Otsuka Pharmaceutical is taking over marketing of the drug. Approximately 479 jobs are expected to be lost.
Future Prospects
Bristol-Myers has been operating in collaboration with other drug manufacturers to develop new products. Most recently, it entered into partnership with India’s premier biotechnology company, Biocon. The company’s hopes are pinned on the success of Eliquis, which will face intense competition from Johnson & Johnson’s blood-thinner ‘Xarelto’ and Boehringer Ingelheim’s ‘Pradaxa’. The profitability of Eliquis will be highly dependent on the strategies adopted by competitors. Furthermore, since the drug was developed in collaboration with Pfizer, profits will be shared between the two companies.
The stock pays a yearly dividend of $1.36 per share and yields 4.17% based on the current price. In order to keep its stock attractive to investors, it has kept a highly stable cash flow in order to maintain a high-yield dividend. The company has a diverse portfolio of drugs, and invests generously in its research wing to ensure its pipelining for the future. These aspects are key to the belief in a long-term increase in the company’s cash flow and its continued status as a dividend stock.
Bristol-Myers Squibb vs. the Rest
Bristol-Myers’ competition in the biopharmaceutical industry is represented by Pfizer (NYSE: PFE) and Merck & Co (NYSE: MRK). At times, there are competing drugs made by these manufacturers, otherwise their stock performance provides a close opportunity cost for investors to choose from. The table below succinctly evaluates the key financials for these companies.
|
|
Bristol-Myers Squibb |
Pfizer |
Merck |
|
Market Cap |
$54.2 bil |
$181.9 bil |
$135.8 bil |
|
Trailing P/E |
29.2 |
21.0 |
20.1 |
|
P/B Ratio |
3.9 |
2.2 |
2.4 |
|
Earnings Growth |
17.0 |
-2.3 |
-17.8 |
|
Dividend Yield |
4.17 |
3.59 |
3.79 |
|
Earnings-Based Payout |
120% |
67% |
71% |
|
Operating Cash Flow Based Payout |
28% |
39% |
45% |
|
Debt/Equity |
0.5 |
0.4 |
0.3 |
|
Return on Equity |
12.4 |
11.3 |
12.2 |
Bristol-Myers Squibb is trading at a premium compared to its competitors and is outperforming Pfizer and Merck in almost all of the above noted indicators. Most importantly, it is one of few bio-pharmaceutical brands that has managed positive earnings growth in the last three years, contrary to the difficult market conditions for pharmaceutical companies in general. Furthermore, the company is not at risk of running neck-high debt to finance growth, which makes the stock safe, yet growth oriented.
Based on the simple earnings-based payout ratio, Bristol Myers's dividend looks unsustainable. Its competitors, Pfizer, and Merck offer payout ratios of of only 67% and 71%, where Bristol-Myers supports an earnings-based payout ratio of 120%. However, digging deep into the cash flow statements one can realize that Bristol-Myers has a very sustainable operating cash flow-based payout ratio of only 28%. That is the company generates substantially higher operating cash-flow than the dividends.
Pfizer has recently lost patent protection for some of its most profitable drugs, which has caused significant decline in its revenue. While the company’s pipelining remains solid, Pfizer is not expected to see market-leading profits in the short run. Merck, on the other hand, has reported better than expected third-quarter results, which should boost its stock performance. Furthermore, its research into new drugs is drawing a lot more attention than its rivals’ due to its relative success. Pfizer and Merck are two of the largest healthcare and pharmaceutical companies in the world. Bristol-Myers has created its flagship drug in partnership with Pfizer, which shows the inter-dependence of the industry.
Foolish Summary
Bristol-Myers Squibb has extremely attractive EPS growth in an industry that is facing a downward trend. This is by far the company’s biggest competitive advantage over its peers. Furthermore, the stock has a high-dividend yield, another incentive for investors. While its competitors may be much larger in size, Bristol-Myers seems to have better growth prospects.
ecofinstat has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
