Financial markets have faced a tough go of it thus far in 2022. Accelerating inflation rates, upcoming interest rate hikes, and geopolitical turmoil amid Russia's invasion of Ukraine have all contributed to the S&P 500's 12% decline year to date.
But not every component of the S&P 500 has fared poorly this year. Pharma stock Bristol-Myers Squibb (BMY 0.34%) has gained 12% year to date. This raises the following question: Has Bristol-Myers rallied too much to still be considered a buy? Let's dig into the stock's fundamentals and valuation to find an answer to this question.
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A robust product portfolio led to a tremendous year
Bristol-Myers recorded impressive results in 2021. Revenue totaled $46.4 billion, which represents a 9.1% growth rate over the year-ago period. How was Bristol-Myers able to deliver such high growth for a company of its size?
As has been the case for a while now, its sales growth was primarily the result of its three megablockbuster products: cancer drugs Revlimid and Opdivo as well as the anti-coagulant drug co-owned with Pfizer, called Eliquis. These three drugs accounted for $31.1 billion, or 67% of Bristol-Myers' total revenue in 2021. But because of the strong demand, they comprised 73% of the company's total revenue growth in 2021 over the year-ago period.
Moving to the bottom line, Bristol-Myers posted $7.51 in non-GAAP (adjusted) diluted earnings per share (EPS) during 2021. This is equivalent to a 16.6% growth rate over 2020. So how did the company accomplish this spectacular earnings growth? A higher revenue base played a role. But there were two other elements in play for the company.
Bristol-Myers' 160 basis point year-over-year increase in non-GAAP net margin to 36.3% in 2021 was a contributing factor. The other component of the earnings growth was that the company's outstanding share count, which is used to calculate non-GAAP diluted EPS, declined by 2.1% year over year. This was due to the company's share repurchase program.
The deep pipeline should bode well for future growth
Bristol-Myers had a very positive 2021. But with each of its top three drugs set to face fierce competition from other drugmakers sometime this decade, it's worth examining whether the company can overcome its patent cliffs. Fortunately, I believe the company will be able to successfully navigate these obstacles.
That's because Bristol-Myers has more than 50 compounds currently in development. The company's potential blockbuster drugs, mavacamten (intended for rare heart disease) and its immunology drug deucravicitinib are both expected to receive regulatory approvals from the U.S. Food and Drug Administration (FDA) this year.
Bristol-Myers' anemia drug Reblozyl and ulcerative colitis/multiple sclerosis drug Zeposia paired with its drug pipeline should more than offset the $12 billion to $14 billion decline in revenue from loss of exclusivity of key brands. That's why Bristol-Myers maintained its guidance of low- to mid-single-digit annual revenue growth for 2020 through 2025.
Analysts are confident that the company can deliver on its revenue growth promise. This explains why analysts are predicting that Bristol-Myers' adjusted, diluted EPS will compound at 5% annually over the next five years.
A market-beating payout that should keep growing
Bristol-Myers seems to be a fundamentally healthy business. And thanks to its manageable dividend payout ratio -- just 26% in 2021 -- the stock's dividend is poised to grow. This also leaves plenty of retained earnings for the company to repay debt, execute share buybacks, and complete acquisitions to further diversify its revenue base ahead of its looming patent expirations. That's why I believe its board of directors was confident enough to authorize a 10.2% increase in the quarterly dividend last December.
The high-single-digit annual dividend growth that I'm expecting going forward, coupled with a market-beating 3.2% dividend yield, makes Bristol Myers Squibb a solid dividend growth stock.
The stock appears to be undervalued
Despite the year-to-date rally, Bristol-Myers' stock looks attractive on a peer-to-peer basis. That's because its forward price-to-earnings ratio of 8.3 is well below the industry average of 10.8.
And compared to its own history, Bristol-Myers' 3% trailing dividend yield is slightly higher than its 13-year median of 2.9%. That's why I'd argue that the stock is currently a decent buy for both value investors and dividend growth investors.
