If you think that a business selling generic versions of hit drugs like Viagra and Humira will never get old, Viatris (VTRS 0.87%) is right up your alley. As the new generics player on the block, the company is still finding its footing, and it might take a few years for Viatris to settle into its position in the market and demonstrate its long-term growth potential. And that means its stock just might be worth a purchase.
Today, I'll be discussing two reasons why it might be worth picking up a few shares before it has a history of success, and finish with a brief caveat which could be a compelling reason to avoid the stock or sell it. In my view, the upsides outweigh the drawbacks, so let's dive in.
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The dividend keeps getting bigger
One of the big draws to stable pharma manufacturers like Viatris is the prospect of collecting a sizable dividend.
Demand for existing generic drugs doesn't change that much from quarter to quarter, which means that its cash flows are predictable and unlikely to evaporate overnight. As a result, it can afford to pay shareholders some of the leftover money each quarter without detracting from the funds set aside for growth initiatives.
Right now, Viatris' dividend currently has a forward yield of 3.21%, which isn't half bad. Management has made clear that hiking the dividend is going to be a priority, and share buybacks could be in play for the future too.
On Jan. 6, company announced that the dividend for 2022 would be 9% higher than in 2021. That marks the fourth consecutive payment of what will eventually be many more. Over time, that income can build up into a tidy hoard, and so people who buy the stock now would get the biggest benefit from the accrual over time.
Its shares are valued at a steal
Valuation shouldn't be the only reason why you buy a stock, but attractively priced shares can be a big part of the decision about when to make a purchase. And in this case, Viatris is valued so cheaply that it's hard to pass up. The pharmaceutical industry has an average price-to-sales (P/S) ratio of 4.84. In contrast, Viatris is valued at a P/S multiple of 0.95.
It won't be so cheap forever. As its portfolio of generics grows with each passing quarter, its base of recurring revenue will slowly grow larger and larger. However, since its quarterly revenue has only inched 2.4% higher in the last 12 months, investors should keep in mind that this is a long-term strategy.
Now, this stock isn't perfect, so let's take a look at one reason why someone might want to sell it or avoid a purchase.
However, it (still) isn't profitable
Despite Viatris' virtues as an investment, it does have one major issue: Profitability.
It hasn't had a single profitable quarter, and investors might need to wait for a few more quarters before it does. For a stock intended to be a relatively safe and stable option, lacking profitability is a major drawback as an unprofitable company will struggle (to say the least) when it comes to following through on cash-intensive shareholder rewards like dividend hikes and share buybacks.
What's more, generic drug manufacturing is about playing the long game, and a core part of the business model is using economies of scale to cheaply produce massive volumes of medicines. Ramping up new production lines might take years to pay off. And the clock is ticking.
But things have steadily improved since the company's formation in late 2020, when generics manufacturer Mylan merged with Pfizer's generics division. Management contends that it'll realize $1 billion in cost synergies by 2023, which should help its profit margin immensely. Already, in the past year Viatris' quarterly total expenses have fallen as a percentage of revenue from above 104% to 92%.
If you're an especially conservative investor, this is probably not the right stock for you -- but it may well be in a year or so if current trends continue.
