When you think about dividend stocks, biotechs probably don't immediately come to mind. However, a handful of the largest biotechs offer dividends.
Gilead Sciences' (GILD -0.06%) dividend program especially stands out. The company arguably offers the best dividend of any biotech. But is Gilead a great dividend stock?
What makes a dividend stock great?
To answer the question, we first need to establish exactly what makes a dividend stock great. One important factor is obvious: an attractive dividend yield. The average dividend yield for the S&P 500 is 1.8%. To be viewed as a great dividend stock, a company should offer a much higher yield than that. A dividend yield of 3% would probably be a minimum threshold, although some might push for an even higher level of at least 4%.
Another critical criterion for determining if a given dividend stock is truly great is the company's track record of dividend increases. The greatest stocks on this front are Dividend Aristocrats and Dividend Kings. The former are members of the S&P 500 with at least 25 consecutive years of dividend hikes. The latter group raises the bar to 50 years in a row of dividend increases.
There's a good argument to be made, though, that a company doesn't have to be a Dividend Aristocrat or Dividend King to qualify as a great dividend stock. For example, the stocks of companies that have steadily increased their dividends by significant amounts for extended periods, albeit shorter ones than 25 years, could be better picks than Dividend Aristocrats that have barely increased their dividends each year. With this in mind, let's go with an admittedly arbitrary threshold for greatness: at least seven consecutive years of dividend increases, with a minimum average increase of 10%.
Past performance is good, but it's even more important that a company be able to keep increasing its dividend in the future. One commonly used metric to measure the sustainability of a company's dividend is its payout ratio -- the amount it pays in dividends, divided by its total earnings. A great dividend stock should have a relatively low payout ratio, ideally no higher than 50%.
How Gilead measures up
Gilead fares really well on the first criterion for dividend greatness: The biotech's dividend currently yields north of 4.5%. However, Gilead only recently topped the 4% minimum yield that some investors might prefer. Over the last five years, the stock's dividend yield was typically well below 4%.
The company initiated its dividend program in 2015. The good news is that Gilead has increased its payout every year since then. Overall, the biotech has boosted its dividend by more than 58%. The bad news, though, is that track record isn't long enough to meet the minimum threshold we established earlier.
Gilead's payout ratio currently stands at over 270%. That sky-high metric is several times greater than our 50% target. There's a problem with payout ratios, though: They use earnings based on generally accepted accounting principles (GAAP), which can sometimes make a company's bottom line look weaker than it really is.
That's the case with Gilead. The biotech's acquisitions and collaborations reduced its GAAP earnings in 2020 and made its payout ratio shoot through the roof. The reality is that Gilead appears to be in a strong position to keep its dividends flowing and growing well into the future.
Where Gilead especially falls short
There's one other thing that makes a dividend stock great that wasn't mentioned earlier. A truly great dividend stock won't just provide an attractive and increasing dividend to investors; it will also deliver solid gains over the long run. This is where Gilead falls particularly short.
Over the last five years, Gilead stock has fallen more than 40%. So far in 2020, the biotech's shares are in negative territory, while the overall stock market has risen.
Gilead faces several headwinds. Its hepatitis C treatment franchise continues to flounder. The company's HIV drugs Biktarvy and Descovy are performing well, but sales are slipping for its older Truvada-based HIV drugs. Gilead had high hopes for autoimmune-disease drug filgotinib, but the FDA gave a thumbs-down to the drug earlier this year as a potential treatment for rheumatoid arthritis.
What about Gilead's COVID-19 therapy Veklury (remdesivir)? Sales are booming for now. Trouble could be in store, though, as the World Health Organization recently recommended against its use in treating COVID-19, saying there's not enough evidence that it actually helps patients with the coronavirus-caused disease.
Maybe Gilead's acquisitions to bolster its oncology pipeline could enable the company to return to growth. However, it's too soon to know if the biotech's deals will pay off.
For now, Gilead qualifies as a reasonably good dividend stock for investors who aren't concerned about growth. But is Gilead a great dividend stock? The answer is clearly "no."