For a dividend stock to be great, it should provide investors with a strong and growing payout, and its dividend should also be sustainable. Otherwise, the dividend stock may not be safe or worthwhile for long-term investors to hang on to.
Today, let's take a look at drug maker Amgen (AMGN 0.86%) and its dividend to see if it's a dividend stock that's 'great' and that income investors should hold in their portfolios.
Amgen's dividend currently pays 2.7%
Investors who hold Amgen shares currently receive quarterly dividend payments of $1.60. Annually, that means they'll be earning $6.40 which at a stock price of around $235 means its current dividend yield is over 2.7%. That's better than the S&P 500 where investors typically can expect to earn around 2%. And that also means it checks off the first box of being a 'great' dividend stock -- it provides investors with an above-average yield.
The stock's been increasing its dividend for nine years in a row
Amgen's been paying a dividend since 2011, and every year after that it's hiked its payouts. On Dec. 11, 2019, the company announced it would be increasing its dividend by 10%, from $1.45 to its current amount of $1.60.
Five years ago, Amgen was paying its investors a quarterly dividend of $0.79. Since then, its payouts have more than doubled. During that time, the company's been increasing its dividend payments by an average of more than 15%.
That's an unsustainable rate, and that's why it's no surprise that Amgen's most recent increase was a more modest 10% bump up. Given COVID-19 and the recession the economy's in right now, it wouldn't be surprising if there are smaller increases (assuming Amgen continues making them) in the future.
Is the dividend safe?
When looking at the safety of a dividend payout, it's always good to consider not just profits but also the company's free cash flow.
In terms of profitability, over the past four quarters, Amgen's diluted per-share earnings have come in at around $12.77. That's well above the $6.40 that Amgen's paying out in dividends per year, and equates to a payout ratio of 50%.
A look at the company's cash flows over the past four quarters suggests much of the same -- the dividend is sustainable. In each of the past four quarters, Amgen's free cash flow has been far above the amount that it's paid out in dividends to its shareholders.
Is the business in good shape?
Investors should also consider the health of the business moving forward when assessing a dividend stock. Thus far, there have been no signs of concern for Amgen as the California-based business has reported a profit for nine straight quarters and in each of the past 10 years. And only once during the past decade has its profit margin fallen below 20%.
Sales growth has been a bit more difficult to come by as the company's top line declined by 1.6% in 2019. But in the first quarter, Amgen's revenue grew 11% as it benefited from a full quarter of sales from Otezla, which it acquired from Celgene for $13.4 billion. The transaction was completed last November, so it's only recently that Otezla has contributed to Amgen's financials. The drug, which patients use to treat psoriasis, will help boost the company's results and strengthen its bottom line, and thus, could make the dividend stronger and more sustainable.
Most importantly, COVID-19 isn't having a detrimental impact on the company's results, at least not yet. In an update dated June 18, Amgen noted that it doesn't anticipate a shortage of its medicines due to the pandemic. But it has noticed delays in patients beginning treatments, as the focus for physicians and the healthcare industry has been on COVID-19.
Overall, the business still looks strong, especially with Otezla now in the mix.
Yes, Amgen is a great dividend stock
The healthcare stock hit all the checkboxes of being a 'great' dividend stock. Ideally, I'd like to see the stock's yield a bit higher -- at least 3%. But if you're a long-term investor, your dividend payments are likely to rise over the years and the amount you're making on your initial investment could be a whole lot more in a year or two than what it is today. There's also plenty of room for the company to continue raising its payouts given its modest payout ratio.
Shares of Amgen are down 2% this year, which isn't bad given the S&P 500 has fallen 5%. The stock's stability combined with its great dividend makes Amgen a solid investment that you can hang on to for the long term.