Numerous worries about the state of the global economy and geopolitical climate have led the S&P 500 index to dip 18% so far this year.
But not all stocks have fared poorly in 2022. In particular, healthcare stocks have held up quite well so far. And shares of one of the most dominant pharmaceutical stocks, Bristol Myers Squibb (BMY -8.51%), have soared 29% higher in 2022.
After such a run, is the stock a buy for dividend growth investors? Let's dive into Bristol Myers' fundamentals and valuation to address this question.
Decent results despite the headwinds
With roots going back to the late 19th century, Bristol Myers has evolved from a modest company to a multi-national juggernaut. This was the result of its ability to cultivate a culture of innovation over the years. For context, Bristol Myers' $168 billion market capitalization makes it the sixth-biggest pharmaceutical company in the United States and the ninth-largest pharma company on the planet.
Bristol Myers' $11.2 billion in revenue fell 3.5% year over year in the third quarter ended Sept. 30. On its own, this would seem to be a poor result for revenue. But it's important to note that the decline was due to unfavorable foreign currency translation on the $3.3 billion in international revenue. That's because the U.S. dollar has been unbelievably strong against other global currencies lately, which is a negative for a company like Bristol Myers with a meaningful international presence. Adjusting for the foreign currency translation, the company's revenue was flat for the quarter.
Respective double-digit and high-single-digit year-over-year growth in cancer therapy Opdivo and the blood thinner Eliquis (co-owned with Pfizer (PFE -3.85%)) were largely responsible for the growth during the quarter. This was offset by a 28% drop in sales of products that have recently lost exclusivity. This includes cancer drugs Revlimid and Abraxane, which saw increased competition from generic versions.
Bristol Myers recorded $1.99 in non-GAAP (adjusted) diluted earnings per share (EPS) for the quarter, which was 3.1% higher than the year-ago period. The company's non-GAAP net margin edged nearly 70 basis points higher year over year to 38% in the quarter. The EPS did get some boost from stock repurchases in the quarter that resulted in a 4.2% drop in weighted-average diluted shares outstanding.
Bristol Myers' pipeline consists of over 50 compounds in different stages of clinical development. These are diversified across numerous therapy areas, including oncology, cardiovascular, and neuroscience. This is why analysts are projecting 4.4% annual adjusted diluted EPS growth over the next five years.
Image source: Getty Images.
A well-covered dividend
Bristol Myers' 2.7% dividend yield is a full 100 basis points above the S&P 500 index's 1.7% yield. Yet the dividend still has plenty of flexibility to be hiked higher in the years ahead. That's because Bristol Myers' dividend payout ratio stands at only a bit more than 28%. The company can then retain the vast majority of its funds to finance acquisitions, do share buybacks, and repay debt.
Thanks to the low payout ratio, I expect the rate of dividend growth to be greater than the rate of earnings growth in the years to come.
The stock is a good value
As hot as Bristol Myers' stock has been in 2022, it looks like there could still be further upside. This is because the stock's forward price-to-earnings (P/E) ratio of 10.1 is well below the general drug manufacturer industry average of 11.9. To be sure, Bristol Myers will face major patent expirations for Eliquis and Opdivo later this decade. But with its solid drug pipeline and ability to complete bolt-on acquisitions in the future, this risk appears to be priced into the stock.
