Worries over rising inflation, future interest rate hikes, and a possible economic downturn have led financial markets lower year to date. The S&P 500 index has dipped 17% so far this year. But steady dividend payers have fared much better.
For instance, shares of the pharma stock Amgen (AMGN 0.61%) have gained 12% year to date. Even with the recent rally in Amgen, I believe the stock is a great buy-and-hold candidate. Here are three reasons why.
1. The company often defies expectations
In late April, Amgen announced results for its first quarter (ended March 31) and they managed to exceed analysts' consensus estimates. The company reported $6.2 billion in total revenue in the quarter, up 5.7% from the year-ago period. This narrowly topped the average analyst estimate of $6.1 billion. So how did Amgen surpass the analyst consensus for eight of the last 10 quarters?
First, product sales edged 2.5% higher over the year-ago period to $5.7 billion. Product sales are the products that are directly sold by Amgen, such as the osteoporosis drug Prolia. Volume growth in newer products like the high cholesterol drug called Repatha offset volume declines in the immunology drug Enbrel. This explains how the company's product volumes were 9% higher in the first quarter. Higher product volumes were only partially offset by a 7% lower net selling price (stemming from declines in the net price of off-patent drugs like kidney disease treatment Epogen).
Simply put, Amgen's new products are more than offsetting the revenue declines that are being experienced with older products. Meanwhile, manufacturing COVID-19 antibodies for Eli Lilly as part of a manufacturing collaboration helped Amgen's other revenue soar 64.1% higher year over year to $507 million in the first quarter.
On the profit front, Amgen recorded $4.25 in non-GAAP (adjusted) diluted earnings per share (EPS) during the first quarter, up 14.9% from the year-ago period. This slightly beat the average analyst estimate of $4.22. How did the company outdo the analyst earnings consensus for nine out of the past 10 quarters?
Amgen's higher revenue base and a 110-basis point expansion in its non-GAAP net margin to 37.6% were one component of its strong earnings growth. This helped non-GAAP net income to increase by 9% year over year. Another element to the impressive EPS growth was a 5.2% reduction in Amgen's outstanding share count to 551 million in the first quarter. This was due to the company's aggressive share repurchase program, which increased shareholders' piece of the profit pie.
And thanks to Amgen's nearly 40 compounds in different stages of clinical development, analysts anticipate the company will deliver 7.1% annual earnings growth through the next five years.
2. A well-covered dividend with high growth potential
Amgen also boasts a dividend that is well-covered. Its dividend payout ratio is expected to be 44% in 2022. This means that Amgen is retaining the majority of its earnings to invest in acquisitions, complete share repurchases, and repay debt.
The company has a bit of flexibility to grow its dividend ahead of its earnings. This is why I believe Amgen will hand out high-single-digit to low-double-digit annual dividend increases over the next few years. Paired with the stock's market-beating 3.1% dividend yield, this makes Amgen an excellent stock for income investors.
3. A fairly valued stock
Amgen looks like it is still a reasonably priced stock. This is because its forward price-to-earnings ratio of 14.5 is only slightly higher than the pharmaceutical industry average of 13.1. For a stock that's as established as Amgen, this is a sensible premium to pay.
And looking at the stock's trailing 12-month price-to-sales ratio of 5.4, this is virtually the same as its 10-year median of 5.3. Amgen's fundamentals appear to still be solid, so this is hardly an expensive valuation either.