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What Investors Are Missing About Gilead Sciences

By Eric Volkman – May 10, 2020 at 6:28AM

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Hint: it's something that happens once every quarter.

Gilead Sciences (GILD 1.90%) is quite the famous pharmaceutical company these days. Its antiviral remdesivir is the hot drug of the moment due to its apparent success in clinical trials with patients who have COVID-19, the disease caused by the SARS-CoV-2 coronavirus.

A hot drug leads to a lot of interest in a stock, which is the key reason why Gilead's shares have generally been on the rise since the world became reacquainted or initially acquainted with remdesivir (formerly a treatment for Ebola). But I think that as an investment, the company has another very attractive factor that isn't getting quite so much attention -- or any at all.

Two medical professionals conferring in a busy hospital lobby.

Image source: Getty Images.

Profit participation

That under-the-radar factor is Gilead's quarterly dividend, which is generous relative to the broader stock market's average dividend, and it's consistent and dependable to boot.

Since the company initiated the investor payout in 2015, it has risen steadily from $0.43 to the present level of $0.68 thanks to its annual raises. At the moment the dividend yield is 3.5%, which compares very favorably to the 2.1% average yield of all S&P 500 stocks (a group which, to be fair, includes numerous companies that don't pay dividends).

As with any dividend investment, though, we have to consider whether Gilead's payout is sustainable. After all, there's little point in buying a stock for its dividend if that payout will be reduced or eliminated -- which is not an unusual occurrence in an economy being rocked by the coronavirus pandemic.

Looking at the company's fundamentals in recent history, it usually lands in the black on an annual basis -- even following a big fall from its peak sales year of 2015, when it ruled the market for hepatitis treatments (though it has lately been recovering on both the top and bottom lines). From that year on, even with some scary drops in sales and net profit, its annual net margin never fell below 18%.

Wide margins typically mean strong cash flow, and that's the case for Gilead. The company's free cash flow isn't at 2015 levels, but it's still quite robust. For full-year 2019, that line item grew a healthy 11% year-over-year to over $8.3 billion. That year the company's total spending on its dividend was $3.2 billion, making the cash dividend payout ratio 39%. So the dividend is, at the very least, sustainable for now.

Assuming Gilead manages to enlarge that free cash flow figure again there's going to be plenty of room for more of those annual dividend raises. At least initially remdesivir won't be a money-spinner, as the company has said it will donate the doses it has on hand. A more promising avenue for growth is the company's HIV drug program, which is stuffed with no fewer than five blockbuster drugs. It also has two treatments in the pipeline, vesatolimod and elipovimab, that could cure HIV entirely.

Another potential blockbuster -- and maybe a multi-faceted one at that -- is immunology drug filgotinib, a rheumatoid arthritis treatment now under priority review by the FDA (it has also been submitted to regulators in Europe and Japan). The global market for rheumatoid arthritis is estimated in the tens of billions of dollars. On top of that, filgotinib is being evaluated for other indications such as ulcerative colitis and Crohn's Disease.

Power and potential

Of course, Gilead isn't the only game in this town; there are other established, cash-rich pharmaceutical companies that pay reliable dividends.

Abbott Laboratories (ABT 0.58%) has been increasing its own payout for decades, to the point where it's a Dividend Aristocrat. Its 2013 spinoff, AbbVie (ABBV 1.50%) inherited a place in that celebrated group of stocks and has kept it by raising the distribution on the regular (it's also still the big rheumatoid arthritis player with its Humira). Gilead's 3.5% yield is close to the midpoint of Abbott Labs' 1.6% and AbbVie's 5.5%.

But in my opinion, Gilead has explosive potential immediately in front of it, more so than Abbott Labs, AbbVie, or numerous other dividend payers in Big Pharmaville. Remdesivir aside, Gilead already has a strong portfolio and an excellent pipeline. Meanwhile, the company's solid cash-generating tendencies, its ability to grow, and its high profitability make it a fine stock for income investors. 

Eric Volkman has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Gilead Sciences, Inc. Stock Quote
Gilead Sciences, Inc.
$63.82 (1.90%) $1.19
Abbott Laboratories Stock Quote
Abbott Laboratories
$98.90 (0.58%) $0.57
AbbVie Inc. Stock Quote
AbbVie Inc.
$143.84 (1.50%) $2.12

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