Although capital appreciation isn't the primary motivating factor for dividend-focused investors, it's never a disappointment to find an undervalued dividend stock that delivers share-price upside.

One stock that Wall Street analysts believe offers 34% capital appreciation from the current share price is generic and biosimilar company Viatris (VTRS -1.14%), which has an average one-year price target of $19.93 (the lowest price target of $15 is still higher than today's, and the highest, at $35, is more than double the current share price).

Let's take a look at the two factors that led analysts to initiate their lofty price targets, as well as whether that makes Viatris a compelling buy for dividend investors.

A doctor and patient meet for an appointment.

Image source: Getty Images.

A fundamentally healthy business

Dividend investors should always look to own businesses for the long term that are steady and capable of delivering growth in the future, and pharmaceutical stock Viatris appears to be just that.

Although Viatris was only recently formed last November as a result of Pfizer's spinoff of its Upjohn business to combine with Mylan, its first two quarters of operating results demonstrate a business that is holding up.

For the six months ended June 30, Viatris' year-over-year combined adjusted operational revenue declined 3% to $8.96 billion. This calculation uses the combined revenue of Upjohn and Mylan from last year, before the two combined to form Viatris, as the company's starting revenue base.

While the revenue decline may not sound great, it's important to note that adjusted operational revenue in the company's brands product category, which contributed 60.5% of first-half sales, was down 6% year-over-year in the first half of 2021. This decline was partially offset by 7% higher adjusted operational revenue in the complex generics/biosimilars segment (7.4% of first-half sales) and flat revenue in the generics segment (the remaining 32.1% of first-half sales). That was driven by continued revenue declines in a number of off-patent products, including Lyrica (which saw a 46% year-over-year decline in the first half, from $706 million in 2020 to $380 million in 2021) and Celebrex (down 42% year over year, from $295 million in 2020 to $171 million in 2021).

Looking ahead, Viatris is in a position to stabilize its revenue as it brings new products to the market to offset sales declines in off-patent brands. The company and its partner, Indian biopharma Biocon, received U.S. Food and Drug Administration (FDA) approval last month to market their biosimilar insulin drug, Semglee, as an "interchangeable biosimilar" -- essentially an alternative to Sanofi's blockbuster insulin drug, Lantus.

Viatris has 10 other biosimilar candidates in its partnership with Biocon that are in various phases of clinical trials (such as a biosimilar for Sanofi's Toujeo insulin drug), which should help the company stabilize its revenue in the near future.

While Viatris does carry a significant amount of debt on its balance sheet, the company has made strong progress in deleveraging through the first half of this year. With the $1.27 billion in free cash flow (FCF) that Viatris generated in the first half of this year, it repaid $1.15 billion in long-term debt. This brought its total long-term debt down to $23.1 billion (more than the company's $18 billion market capitalization), which works out to a debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization) ratio of 3.7 (based on its $6.3 billion in midpoint EBITDA for this year).

Viatris is taking deleveraging efforts seriously. The company is currently on track to meet its goal of reducing its long-term debt by $6.5 billion by 2023, which would bring the company's debt-to-EBITDA ratio to less than 3 (assuming no growth in EBITDA in the next couple of years).

Valuation results in low hurdles to clear

Despite relatively steady fundamentals, Viatris is trading at just 4 times analysts' average non-GAAP earnings per share (EPS) estimate of $3.53 for this year, and at only 8 times its forecast of $2.2 billion to $2.4 billion in FCF for this year.

For a business whose products are a regular part of many people's lives and are generating a great deal of cash flow for shareholders, it's surprising that Viatris could be trading so cheaply.

The market's skepticism to this point has likely been a result of the company's brief history (as its own concern) and its high levels of debt. While it's hard to predict market moves in the near term, I anticipate that Viatris will eventually see upside in a couple of years  as the company continues to work toward its 2023 debt repayment target and reports acceptable operating results.

An undervalued stock with dividend growth potential

It's anyone's guess where the stock price of Viatris will be a week, month, or quarter from now. But over the long term, the company's commitment to developing new biosimilar and generic drugs and paying down debt should eventually translate into an upward adjustment of the valuation multiple.

With an annual payout of $0.44 per share compared to $3.53 in non-GAAP EPS expected for this year and $3.67 forecasted for next year (due to the company's anticipated cost synergies), Viatris' 2.9% yield appears to be safe with room to grow.

For the sake of conservatism, let's assume that Viatris' P/E ratio expands from 4 to 6 in the next two years (I still think that's rather low, even for a modest growth company like Viatris). This would take the share price to $22 (factoring in 2023 EPS of $3.67, which is flat compared to 2022 analyst estimates), which --  along with a couple of years of a near-3% yield -- would result in 52% upside from the current share price.