In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:
- Over time, has this company steadily increased its payouts?
- How sustainable is the dividend?
- Does the company have room to further increase the dividend?
The Dividend Report Card wasn't designed as a buy or sell signal but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.
Today's pupil is Bristol-Myers Squibb
Dividend history
|
Metric |
5-Year Annualized Growth Rate |
|---|---|
| Dividend per share | 2.9% |
Source: Bristol-Myers Squibb investor relations.
Bristol-Myers Squibb's dividend track record leaves a little something to be desired, especially when inflation (as measured by the CPI) was around 2.1% annualized over the same period.
Based on the low growth rate, Bristol-Myers Squibb scores a 2 of 5 in this category.
Sustainability
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
| Interest coverage | 43.2 times | 10% | 5 |
| EPS payout ratio | 71% | 10% | 4 |
| FCFE payout ratio | 86.8% | 30% | 3 |
Source: Capital IQ, a division of Standard & Poor's, as of Feb. 24.
Bristol-Myers Squibb has one of the better balance sheets in the market (Morningstar gives it a credit rating of "AA+") as it can cover its interest payments many times over and it has a relatively low debt-to-capital ratio of 25.8%.
The company pays out a large percentage of its earnings and free cash flow out as dividends, however, and with the blockbuster drug Plavix coming off patent in 2012, investors would be wise to monitor these payout ratios in the coming years.
Growth
|
Metric |
Trailing 12 Months |
Final Grade |
Report Card Score |
|---|---|---|---|
| EPS payout ratio | 71% | 10% | 3 |
| FCFE payout ratio | 86.8% | 20% | 2 |
| Sustainable growth rate | 8.6% | 10% | 4 |
According to Capital IQ, the median analyst estimate for long-term EPS growth is 1.6%. When you take that rather lacklustre outlook with the fact that Bristol-Myers already pays out the bulk of its earnings as dividends, the dividend growth potential appears to be rather modest.
A 3% dividend growth rate over the next five years may not be great, but it may not be terrible, either, when you consider the 5.2% starting yield.
Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against that of direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.
|
Company |
Dividend Yield |
Est. Long-Term EPS Growth |
|---|---|---|
|
Pfizer |
4.3% | 2% |
|
Merck |
4.7% | 5% |
|
Eli Lilly |
5.8% | (7%) |
Compared to this group, Bristol Myers's current yield at 5.3% doesn't seem too high or too low relative to analyst earnings growth estimates of 1.6%.
Pencils down!
With all the numbers in, here's how Bristol-Myers's dividend scored:
|
Weighting |
Category |
Final Grade |
|---|---|---|
|
10% |
History |
2 |
| Sustainability | ||
|
10% |
Interest Coverage |
5 |
|
10% |
EPS Payout Ratio |
4 |
|
30% |
FCFE Payout Ratio |
3 |
| Growth | ||
|
10% |
EPS Payout Ratio |
3 |
|
20% |
FCFE Payout Ratio |
2 |
|
10% |
Sustainable growth |
4 |
|
100% |
Total Score (out of 5) |
3.1 |
| Final Grade |
C+ |
There are a number of high-yielding pharmaceutical stocks in the market today and with some major patent expirations coming up, selectivity is paramount. Bristol-Myers isn't without its risks, but it is one worth considering if you're looking to add some pharmaceutical exposure to your dividend-focused portfolio.
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