Pharmaceutical stocks have been trading at a relative discount to the broader market recently, with the Vanguard Health Care Index Fund ETF (VHT 0.13%) currently boasting a price-to-earnings ratio of about 14.45. That's cheap compared with, say, BlackRock's S&P 500 ETF (IVV -0.41%) and its current P/E of 18.57.
One particularly notable sale-priced company in the sector is the pharmaceutical giant Bristol Myers Squibb (BMY -0.70%) The company has recently made acquisitions, increased dividends, and launched a new share buyback program, making 2021 a great time to buy in.
Dominant again through acquisitions
Bristol Myers Squibb was founded in 1858 by Edward Robinson Squibb in Brooklyn. The company has been at the forefront of contributions to medicine ever since, bringing the world blockbuster drugs such as Coumadin (blood thinners), Orencia (for rheumatoid arthritis), and many more. In the past few years, however, Bristol Myers Squibb's business has stagnated as patents have expired on some of its drugs.
However, the company has reinvigorated itself in recent years through acquiring younger companies -- first Celgene in 2019 for $74 billion, and most recently MyoKardia in 2020 for $13.1 billion. These acquisitions have not only bolstered the company's pipeline, but have added new revenue streams for existing drugs.
A new, robust pipeline
Bristol Myers Squibb has several blockbuster drugs currently on the market, with many more in the pipeline. The company has three heavy hitters in Opdivo (for bladder cancer), Eliquis (an anticoagulant), and a new drug called Revlimid (its latest cancer-fighting blockbuster, with sales up more than 10 times year over year to $12.1 billion in 2020). It also boasts three smaller but very fast-growing contributors in cancer drugs Pomalyst, Abraxane, and Vidaza. The Celgene merger has contributed to remarkable growth, with Pomalyst in particular up 1,000% to $3 billion in sales in 2020 from $322 million in 2019. The bottom line is that Bristol Myers Squibb's array of products looks great, and its recent acquisitions are providing it with the resources to deliver ever more breakthrough products to the market.
Get it while it's cheap
Over the past five years, Bristol Myers Squibb has historically traded at a P/E of about 18. Currently, its forward P/E ratio is just 8.75. Earnings have been growing at incredible rates -- up 32% year over year in 2018, 18% in 2019, and 37% in 2020. Nonetheless, the stock still has not regained its all-time high of $76, which it reached back in July of 2016.
Bristol Myers Squibb looks very attractive at current levels. If we take the company's 2020 earnings per share of $6.44 and apply a P/E of 18, we get a valuation of about $115 a share. But 2021's financial guidance calls for EPS of about $7.44 -- apply the historical 18 P/E to that and we reach $133.92 a share, leaving lots of room for growth from today's $66 and little downside.
Now, is it realistic for Bristol Myers Squibb to double in stock price in just one year? Given the sharp volatility in pharmaceuticals, we could expect a lot of share-price growth in a short amount of time -- for example, competitor Eli Lilly's share price was up almost 45% between November and January. Buying Bristol Myers Squibb at this low of a valuation can bring a lot of upside with very little downside.
Great products and growing dividends
Through its acquisitions and assorted new offerings, Bristol Myers Squibb has once again made it known that it is a power player in the pharmaceutical industry. Sales of its existing drugs are also growing at fast rates, and the company has been rewarding shareholders handsomely over the past few years. In December, the company hiked its dividend payout by 9.52%, and the current dividend per share per quarter now sits at $0.49. Bristol Myers Squibb is currently a dividend achiever with an 11-year track record of annual dividend increases.
Low valuation, a growing number of drugs on the market, and increasing dividends are all reasons why Bristol Myers Squibb makes a great investment. Buying at today's prices and holding for the long term should reward investors not just in 2021 but over the long term.