Do you read The Wall Street Journal? Every once in a while, it comes up with a brilliant idea -- like its idea this week, to consider buying shares in biotech giant Gilead Sciences (GILD 3.07%) as a high-yielding "haven" in an uncertain market.
As WSJ tells it, Gilead stock has been a pretty lousy investment for investors this past half-decade or so, losing 8% of its market cap as the S&P 500 climbed 54%. But the good news is that, after having disappointed investors for so long, much of the risk has been wrung out of Gilead stock -- transforming the stock into both a deep value bargain and a tremendous dividend stock.
In fact, Gilead just might have one of the safest dividends on Earth.
What Gilead got wrong
The problem with Gilead is that since coming up with a brilliant treatment for hepatitis C (HCV) early last decade, and adding that to its well-established HIV division, Gilead proceeded to spend the next several years striking out on multiple acquisitions. In total, WSJ calculates that Gilead has spent more than $40 billion buying up cancer drug developers over the past five years, "with little to show for it."
But here's the thing: While Gilead's oncology division is making only minimal progress and its HCV division is shrinking by leaps and bounds, its HIV business is actually holding up pretty well over time, generating more than $16.3 billion in sales last year (down from $16.4 billion two years ago). As a result, Gilead may not look like much of a growth story right now, but the tremendous cash flows still originating in its HIV division are sufficient to support a very generous annual dividend payout of 5.1%.
NASDAQ: GILD
Key Data Points
What investors can get right with Gilead
That's more than three times the average dividend yield on the S&P 500, by the way. And in addition to getting a great dividend yield, investors in Gilead today can expect to get a great deal on the stock price.
Consider: At $72.5 billion in market capitalization, and with about $20.2 billion in net debt, Gilead stock sports an enterprise value of $92.7 billion currently. Given that the stock is earning $4.5 billion in annual profit, that works out to a P/E ratio of about 20.6 -- roughly in line with the average valuation of the S&P 500.
But Gilead's reported net income actually understates the stock's true earnings power to a significant extent. According to S&P Global Market Intelligence figures, Gilead generated positive free cash flow of nearly $10 billion over the last 12 months.
That's more than twice Gilead's reported net income. Put another way, Gilead stock sells for barely nine times free cash flow currently, and that's a valuation cheaper than almost anything else you'll find on the S&P 500 today.
That $10 billion is also nearly three times as much cash as Gilead needs to pay its dividend obligations, meaning Gilead's 5.1% dividend yield is rock-solid safe. It's not going anywhere, no matter how far the stock falls. (Well, within reason. The good news, though, is that according to Gilead Chief Medical Officer Michael Yee, the company has learned its lesson and won't be paying any "enormous price tag" on any future acquisitions, which should help to keep its dividend secure.)
If you're looking for a safe dividend stock to buy in an uncertain market, you could do a whole lot worse than by starting (and ending) your search with Gilead Sciences.
