Investors have turned to the pharmaceutical industry for solid dividend stocks for a long time. However, biotechs typically weren't high on the list when it came to dividends. Over the past few years, though, Amgen, Inc. (NASDAQ:AMGN) and Gilead Sciences, Inc. (NASDAQ:GILD) have risen in prominence as attractive alternatives for dividend-seeking investors.
Amgen initiated its dividend program in 2011. Since then, the biotech has claimed one of the fastest-growing dividends on the market. Gilead Sciences paid its first dividend just a couple of years ago, but the biotech's status as a relative newcomer to the dividend world shouldn't deter investors. Here are three reasons why Gilead is a better dividend stock than Amgen.
The most obvious way that Gilead beats Amgen as a dividend stock is in the ever-important area of yield. Gilead's dividend currently yields 3.24%. Amgen's dividend yield stands at 2.94%.
This advantage that Gilead holds isn't insurmountable, though. Amgen increased its dividend by 15% for 2017. If the company repeated that rate of increase next year and Gilead chose to maintain its dividend at the current level, Amgen would take the lead.
I wouldn't be surprised if Amgen does increase its dividend another 15% for 2018. However, I don't think Gilead will leave its dividend as is. The biotech has hiked its dividend by roughly 10% each of the past two years. At the RBC Capital Markets healthcare conference in February, Gilead CFO Robin Washington stated that the company's dividend program would be the focus for shareholder return.
2. Payout ratio
Not only does Gilead boast a higher yield than Amgen, but it also has the better dividend payout ratio. Gilead currently uses a little over 20% of its earnings to fund the dividend program, while Amgen uses nearly twice as much to pay its dividends.
Based on payout ratio, Gilead is in better position to increase its dividend than Amgen is -- for now, at least. It's likely that the tables will be turned unless something changes, though. Gilead's continued drop in hepatitis C drug sales are pulling down earnings. Wall Street projects that Gilead's earnings will keep falling. Amgen's earnings are expected to grow, although at much slower rates than in the past.
It should be noted, however, that these earnings projections are based on the two biotechs' current product lineups and pipelines. Both Gilead Sciences and Amgen could shake things up by making strategic acquisitions.
3. Cash flow
Gilead again tops Amgen when it comes to cash flow. Gilead's levered free cash flow over the last 12 months was $13.8 billion. Amgen's levered free cash flow during the same period stood at $6.9 billion -- just over half that of Gilead's.
While earnings are key for paying dividends, cash flow is even more important. Why? Earnings can be twisted and turned as a result of accounting gimmicks. It's harder to manipulate good old cash flow, though. And it's cash that companies must have to send those dividend payments that investors love.
But will Gilead's falling hepatitis C drug sales pull down its cash flow also? Yes. In fact, that's already happening. However, Gilead should be in good shape to enjoy stronger cash flow than Amgen for years to come.
What about growth (or lack thereof)?
Gilead tops Amgen in all of the important metrics related to dividends. It's the better dividend stock. But is Gilead the better pick for investors? Won't falling earnings drag down Gilead stock more while Amgen shares increase? Perhaps. However, I don't think this will be the case for a couple of reasons.
First, the market has already priced Gilead's hepatitis C struggles into the stock price. Second, while I think that Amgen should make an acquisition, Gilead Sciences appears to be even more highly motivated. It's just a matter of time before Gilead pulls the trigger in buying one or more biotechs to help return to growth. In the meantime, investors can enjoy one of the better dividends around.
Keith Speights owns shares of Gilead Sciences. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short June 2017 $70 calls on Gilead Sciences. The Motley Fool has a disclosure policy.