TipRanks Smart Dividend Newsletter – Edition #35
Hello and welcome to the 35th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is one of the largest and most innovative biopharmaceutical companies in the world, ranking high on dividend, quality, and value metrics.
Investment Thesis: Fruitful Medicines
The biopharmaceutical industry is one of the key players in the field of healthcare, driving the development of innovative treatments that have significantly improved patient outcomes over the years.
The industry’s past and future growth is fueled by several factors: an ever-increasing demand for enhanced healthcare, an aging global population, and a growing focus on maintaining health and wellness. Additionally, its foray into emerging therapeutic areas, including gene therapy and advanced virology, opens up new opportunities for both healthcare and investment.
The biopharmaceutical industry can present an attractive option for those seeking to invest in a sector that sits at the cross-section of scientific advancement and financial resilience.
Quality Dividend Stock: This Week’s Top Pick
Gilead Sciences (GILD) is a research-based biopharmaceutical company, which engages in the research, development, and commercialization of innovative therapies in areas of unmet medical need. GILD primarily focuses on the fields of virology, oncology, and inflammation.
Gilead Sciences was founded in 1987 in Foster City, California, with an aim to develop antiviral medicines. Gilead held its IPO in 1992, and since then its stock has been traded on NASDAQ under the ticker “GILD.”
Today, Gilead is one of the world’s largest drugmakers; it has a market capitalization of $109 billion, annual revenue (in 2022) of $27.3 billion, and a workforce of 17,000 employees. GILD ranks #150 in the Fortune 500 list of the largest U.S. companies by revenue.
Since its inception, the company has made groundbreaking strides in the healthcare industry, with numerous notable advances and breakthroughs in virology. Gilead Sciences is best known as a leading innovator in the field of HIV/AIDS treatments. Its first formula, preventing the replication of the HIV virus, was approved by the FDA in 2001; it became a game-changer in the fight against AIDS, credited with saving millions of lives worldwide. Gilead’s contributions to developing HIV medications helped to transform HIV into a treatable, preventable, chronic condition for millions of people. The HIV treatment line remains a strong backbone of Gilead’s business, accounting for about 74% of total revenues. GILD’s products account for half of the global market for HIV treatment and prevention, and 75% of the market share in the U.S.
In the 2010s, GILD’s success was powered by its advances in the field of hepatitis C medications. The company’s innovative treatments for HCV (hepatitis C virus) helped transform it from a chronic condition to one that can be cured. Today, HCV treatments are responsible for about 12% of Gilead’s total revenue. GILD is the second-largest market player in the global HCV treatment field after Bristol-Myers Squibb.
GILD also played a key role in the response to the Covid-19 pandemic. Gilead developed the first approved antiviral medicine for the treatment of Covid-19, Veklury (remdesivir), which is now considered an antiviral standard for the treatment of the coronavirus.
In addition to virology, the company produces several innovative treatments for some types of cancer and has also developed medications for numerous infectious diseases. Gilead Sciences has a very extensive pipeline, with 61 treatments undergoing different phase trials.
The company has been growing its product suite and pipeline through internal research efforts as well as numerous acquisitions. Thus, in 2020, GILD closed three buyout deals, totaling $27 billion, as a part of Gilead’s push to transform into a leader in cancer treatment. In 2021-2023, the company acquired several biotechnology startups and privately held firms in the fields of immunology, oncology, and inflammation treatment research.
GILD’s financial health is robust. Despite its proactive Research and Development (R&D) and acquisitions policies, Gilead’s debt has continued to decline over the past several years, as the company’s management has been prioritizing debt reduction since 2020. Although its net debt-to-equity ratio is medium-high at 76%, it is much lower than at some of its peers, and well-covered by operating cash flow. Besides, the company’s debt is highly rated by major rating agencies: “BBB+” at S&P Ratings and “A3” at Moody’s.
Notably, S&P Global Ratings said that “Gilead is a highly profitable and innovative biotech company, with a market leadership position in anti-viral treatments,” which benefits from “high barriers to entry, good pricing power, strong profitability, and limited sensitivity to economic conditions.”
GILD’s capital efficiency ratios, particularly Return on Equity, Return on Assets, and Return on Invested Capital, are ranked in the top 20% of its industry, while its strong liquidity position is underscored by higher-than-sufficient current and quick ratios. Gilead’s profitability is outstanding, with gross, EBITDA, operating, net profit, and FCF margins among the highest in the U.S. Biotechnology industry.
Over the past three years, Gilead Sciences has been growing revenues at a CAGR of 6%, while its earnings-per-share (EPS) surged at a CAGR of 67%. This has occurred despite a drop in revenues from its Covid-19 treatment as the pandemic has subsided. Earnings growth and wide margins are supported by GILD’s main products, HIV and HCV treatments, which require very little manufacturing and marketing effort at low cost. GILD’s blockbuster HIV drug Biktarvy will see a patent cliff only in 2033 so that its leading revenue source is protected for almost a full decade.
On November 7th, Gilead reported its Q3 2023 results, featuring a strong beat on revenue and EPS. In contrast to previous quarters where earnings growth was driven only by its virology treatments, in Q3 the company reported a strong input to growth from its developing oncology line. Although revenue was almost flat year-on-year (YoY) due to a drop in Covid-19 drug sales, EPS surged by 20.5% YoY.
While the last quarter of 2023 is estimated to have continued Q3’s trend, analysts’ projections for 2024 are very optimistic. While the company’s HIV treatments are projected to continue generating stable, rising revenues, the HCV market (which was impacted by price-regulation issues) is expected to stabilize, returning to growth. Meanwhile, revenues from oncology treatments are projected to continue their fast growth. Moreover, Gilead has a rich pipeline of oncology drugs with data due next year. If even a portion of these are approved, it would substantially increase the company’s earnings stream. Margins should expand even more given that GILD is moving past its recent increases in R&D costs.
Gilead Sciences’ exceptionally strong free cash flow generation supports its shareholder-friendly capital allocation strategy. GILD has been paying dividends since 2015, growing them each year without a single exception. The company’s current dividend yield of 3.44% is much higher than the average for the U.S. Healthcare sector (1.5%), and analysts expect it to increase to 4% in 2024.
The company’s 9-year track record of constant dividend raises, coupled with a modest payout ratio of 44.5%, and a more-than-sufficient dividend coverage provided by earnings and FCF, supports a forecast of continued future dividend-per-share growth.
In addition to dividends, Gilead rewards its shareholders through buybacks. In Q3 2023, the company repurchased its shares, spending $301 million. In the past decade, GILD has been performing aggressive buybacks, which in total decreased its share count by almost 20%.
Gilead’s stock has risen by 48% in the past three years, and by 9% in the past 12 months, strongly outperforming iShares Biotechnology ETF (IBB), where it is the third-largest holding. The economic uncertainty has weighed on the biotech industry in the past year. However, with the economic horizon brightening and positive developments penciled in for Gilead’s pipeline, the stock may strongly surprise on the upside, increasing even more than the current analysts’ average projection of an upside of about 3% in the next 12 months.
Meanwhile, GILD is trading at very attractive valuations, carrying large discounts to the Healthcare sector averages and standing at the very bottom of the valuation range of its large-cap industry peers.
To conclude, Gilead Sciences is a biopharmaceutical innovator with a robust and profitable portfolio and promising pipeline, which has the potential to increase even further thanks to the company’s demonstrated capacity to perform strategic acquisitions. Its strong balance sheet and exceptional cash flow generation support its large and growing dividend payments. Thus, we view GILD as a significant value play and a quality stock, presenting an attractive long-term opportunity for dividend investors.
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