TipRanks Smart Dividend Newsletter – Edition #9
Hello and welcome to the ninth 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 pharmaceutical producers in the world, which has been raising its dividends consistently for the past 17 years. The company’s stock is now trading at a considerable discount to its peers, presenting a great entry point for investors.
But first, let’s delve into a short update on the latest market developments.
Stock Markets: Taking the Red Pill
Technology stocks have ruled the first half of 2023. Although the rally has been steadily spreading to other sectors, tech is still flying higher than others. We believe it’s time to look around at other sectors and industries, which may now present better upside opportunities thanks to their lower valuations. While we are focused on dividends and quality, we are on a mission to find them at lower prices.
The pharmaceutical industry offers an attractive investment landscape for income-focused investors due to several compelling reasons. Firstly, the pharmaceutical sector exhibits stability and predictability, essential attributes that income investors appreciate. Diseases and health-related issues persist regardless of economic cycles, providing a robust demand for pharmaceutical products. This means that in the long-term pharmaceutical companies can maintain consistent revenue streams, enabling them to deliver stable dividends to shareholders. This defensive characteristic allows income investors to expect regular income, even during economic downturns.
Secondly, many established pharmaceutical companies consistently offer high dividend yields. Large pharmaceutical companies are typically well-capitalized with strong cash flow due to their extensive product portfolios and global reach. Such financial health allows them to disburse impressive dividends, providing a steady income stream for investors. Healthy cash flows also underpin generous buyback programs, providing additional benefits to shareholders.
Lastly, the pharmaceutical industry offers considerable future growth potential. With an aging global population and a higher prevalence of chronic diseases, demand for healthcare services and medications is set to rise. Moreover, continuous innovations, such as gene editing and personalized medicine, present new avenues of revenue. This growth potential translates into opportunities for increased future dividends, offering greater income for investors.
Quality Dividend Stock: This Week’s Top Pick
Bristol-Myers Squibb Co. (BMY), also known as BMS, is a global pharmaceutical company, which engages in the discovery, development, licensing, manufacturing, distribution, and sale of biopharmaceutical products in several therapeutic areas. These include cancer, HIV/AIDS, cardiovascular disease, diabetes, hepatitis, rheumatoid arthritis, and psychiatric disorders, among others.
BMS is one of the world’s largest pharmaceutical companies and consistently ranks on the Fortune 500 list of the largest U.S. corporations. It ranks seventh in the list of the largest pharmaceutical companies in the world by revenue. Headquartered in New York City, BMS has R&D, commercial, and production facilities all over the U.S., as well as in Canada, France, Switzerland, Belgium, the U.K., Ireland, Germany, Japan, India, China, and Spain.
With a market capitalization of $130.9 billion, Bristol-Myers Squibb is a large-cap company, belonging to the Healthcare sector (Industry: Pharmaceuticals).
The company was founded in 1887 as Bristol-Myers Corporation; in 1989, Bristol-Myers merged with its main competitor in the field of antibiotics and anti-cancer treatments, Squibb Corporation, which was founded in 1858. The combined entity became Bristol-Myers Squibb Co., at the time the second-largest drugmaker in the world. The Bristol-Myers Corporation went public in 1921 on the New York Stock Exchange; since the merger with Squibb, it has traded under the ticker BMY.
The global pharmaceutical market has experienced significant growth in recent years, reaching the size of $1.5 trillion in 2022. In the next five years, the global market is expected to expand at a CAGR of 6%, reaching $2.1 trillion by 2028. The U.S. pharmaceutical industry dominates the global pharmaceutical market, accounting for roughly 50% of the global pharmaceutical sales revenue. The United States is expected to continue leading the market in terms of sales. The global trend of longevity and population aging lead to an ever-rising demand for treatments for cancer, chronic illnesses, diabetes, and other diseases, thus supporting the market’s growth. At the same time, the widening use of cloud computing, machine learning, artificial intelligence, and other digital investments helps pharmaceutical companies increase the effectiveness of their research, cut costs, and develop better treatments faster.
The top-three pharmaceutical products sold globally are Humira, Eliquis, and Revlimid; two of them – Eliquis (used to lower the risk of stroke) and Revlimid (a multiple myeloma treatment) – are developed and marketed by Bristol-Myers Squibb. The company is also known for multiple cancer, diabetes, and autoimmune disorder treatments, among others. While cancer treatments top global sales charts, drugs for the treatment of autoimmune diseases and diabetes have experienced some of the largest growth rates in spending in recent years.
Revlimid’s patent expired at the end of 2021, leading to a decline in its sales for BMS, which was expected. Another two of the company’s top-selling drugs, Opdivo and Eliquis, will lose patent exclusivity later this decade. However, the company, known for its extensive development abilities, has more than 50 treatments in development across more than 40 disease areas and has gotten 10 new drug approvals from the Food and Drug Administration in 2022 alone. The company adds several new treatments to its portfolio every year; at least some of these drugs will replace the lost revenue from Revlimid’s loss of exclusivity. BMS pencils in an addition of at least $25 billion to its annual revenues (currently at $45 billion) from its new products by 2030.
Bristol-Myers Squibb Co. has paid dividends since 1970; the company has been raising its dividends consistently for the past 17 years and is on its way to becoming a “dividend aristocrat.” The latest such increase was announced near the end of 2022, taking effect in January of this year. BMS’s dividend yield of 3.6% is twice the average for the healthcare sector and is also much higher than the pharmaceutical industry’s average of 2.2%. Despite the high yield, the company’s dividend payout ratio is a low 28.9%, so there’s plenty of flexibility for management to keep increasing the payout.
In addition to dividends, BMS rewards its shareholders with stock buybacks. In 2022, the company completed an $8 billion share repurchase program and approved a new $7.2 billion program. In the five years ending March 31, 2023, the company purchased its shares for the total amount of $23.5 billion.
Bristol-Myers Squibb constantly seeks to grow its product portfolio, whether through research and development or by acquiring successful companies working within BMS’s line of expertise. The company has made 21 acquisitions, including four in the last five years, and numerous investments. In 2019, it acquired Celgene in a massive $74 billion deal, the largest of the company’s acquisitions. Moreover, the company’s management is said to be looking for opportunities to diversify the portfolio; we expect more acquisitions to come soon.
Thanks to the company’s aggressive growth strategy, combining organic growth and acquisitions, the company’s revenues almost tripled in the past decade, while the earnings-per-share doubled in the same period. In the first quarter of 2023, the company’s revenues were flat year-on-year due to a drop in Revlimid sales. Still, the company managed to surpass analysts’ EPS projections, as it did in all quarters in the past years, with a single exception in Q1 2021, at the height of the pandemic. Q1 2023 EPS increased 4.6% year-on-year after three quarters of no growth, thanks to rapidly rising sales of in-line and new products. The sales of BMS’s new products more than doubled year-over-year, beginning to show a significant contribution to the top line. The management confirmed their full-year revenue 2023 outlook, penciling in a 2% increase, and hiked their EPS projections. Analysts believe that within a short time, BMS will return to its historical double-digit EPS growth levels, as incoming products compensate for the loss of revenue from the expiring patents.
The optimistic outlook is underpinned by the company’s balanced capital strategy, prudent management, and great profitability and capital efficiency metrics. While the company has taken on a large debt to cover its aggressive acquisitions (specifically the Celgene buyout), it constantly works to reduce its debt burden. After the Celgene acquisition, the company’s debt surged to over $50 billion; now it stands at $28.6 billion. Although BMS’s net debt-to-equity ratio is still high at 90%, its debt is well-covered by operating cash flow, while interest payments are covered by EBIT many times over. Besides, the company’s extraordinary cash-generating abilities support a favorable outlook for its balance sheet position. As for the capital efficiency and profitability metrics, Bristol-Myers Squibb boasts a Return on Equity (ROE) of 23.1%, significantly higher than the industry’s average of 17%, and a high Return on Assets (ROA) of 8% (versus a negative ROA average in the Healthcare sector). Furthermore, BMS has strong profit margins: a net profit margin of 16% and an operating margin of 23.4%. Additionally, the company’s EBITDA margin of 42.8% is notably higher than that of its peers, signaling its superior operational efficiency.
The Healthcare sector’s stocks in general, and pharmaceuticals in particular, have had a difficult time since the end of the Covid-19 pandemic, and especially in 2023, as investors flocked to technology stocks, drawn by the advent of AI technology. On top of that, due to the short-term difficulties arising from the patent expiration, Bristol-Myers Squibb has underperformed its industry, as represented by iShares US Pharmaceuticals ETF (IHE). While BMS’s longer-term stock performance has been similar to that of the fund, in the past 12 months the company’s shares declined 16% versus the ETF’s loss of 7.2%; both losses are mostly attributed to this year’s drops.
The stock’s underperformance presents a great entry point for long-term investors, as this very profitable pharmaceutical giant is now trading at a large discount to its sectors, its peers, and its long-term average. At a TTM P/E of 18.0 and a Forward P/E of 12.8, the company trades at a 40% to 50% discount versus the Healthcare sector’s average. Compared to the Pharmaceuticals industry, BMS’s trailing P/E is in line with the average and the forward P/E is slightly cheaper; however, the company is trading at considerably lower valuations than most of its peers of comparable size and profitability. Bristol-Myers Squibb is undervalued compared to its historical prices as well as to its fair value.
Analysts forecast an average 12-month upside of 19.2% for Bristol-Myers Squibb’s stock. Individual investors are bullish about the stock, and hedge funds have been loading up on BMS shares in recent months. Moreover, BMS is rated 9/10 (“Outperform”) by TipRanks’ Smart Score system with a “Moderate Buy” recommendation:
To conclude, Bristol-Myers Squibb is a blue-chip company that has been growing its earnings-per-share for several decades and increasing dividends for almost two decades. Its current slowdown as a result of patent expiration is a normal part of a pharmaceutical company’s business cycle. We are confident that BMS will swiftly return to growth, as its pipeline and new drugs are significant growth catalysts. Therefore, we view its current stock underperformance, which has caused the stock to trade at a significant discount to its peers, as a great entry point for investors.
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