Investors reach financial independence when the passive income (like dividends and interest) their holding generates exceeds their expenses. Getting to that point is simple in theory. It boils down to owning enough dividend-paying stocks with a track record of delivering inflation-beating dividend growth year after year. But which holdings will help you accomplish this?
To kick-start the idea-generation process, it can be helpful to talk about a stock that arguably already meets this requirement and what qualities it possesses. The pharmaceutical company Amgen (AMGN -0.59%) is just such a stock. It's a relatively new addition to the list of stocks that comprise the Dow Jones Industrial Average (added in 2020). And its addition was well-justified.
Let's take a closer look at Amgen's fundamentals and valuation to understand what makes it an excellent dividend growth stock.
Amgen had decent results for the quarter
In the 43 years since it was founded, Amgen has focused on developing pharmaceuticals that help fight against diseases such as cancer and osteoporosis. The company's medicines are prescribed to millions of patients in over 100 countries and territories throughout the world each year. Amgen's $125 billion market capitalization positions it as the ninth-largest drug manufacturer on the planet.
In the fourth quarter, the drugmaker's total revenue decreased 0.1% year over year to $6.8 billion. Amgen's total product sales in Q4 increased 4.5% year over year to just shy of $6.6 billion, which was the result of 10% product volume growth. Double-digit volume growth in the osteoporosis medicines Prolia and Evenity and the oncology therapy Kyprolis more than offset volume declines in the immunology drug Enbrel.
With some drugs (like Enbrel) facing pricing pressures from competitors, the average net selling price fell 3% year over year. Currency exchange headwinds unfavorably affected product sales by 2 percentage points. Finally, a sharp drop in demand for COVID-19 antibodies that the company was manufacturing for Eli Lilly led the "other revenue" segment to get cut in half to $287 million in Q4. Combined, these three factors are why Amgen's total revenue was essentially unchanged year over year.
The company's non-GAAP (adjusted) diluted earnings per share (EPS) dipped 7% year over year to $4.09 during Q4. Amgen's non-GAAP net margin declined by 410 basis points over the year-ago period to 32.2% for the quarter. But this reduced profitability was partially offset by a 4.6% reduction in the company's weighed-average diluted share count.
Image source: Getty Images.
Income and growth should improve for Amgen
Looking forward, Amgen's future is bright. Thanks to the dozens of compounds in its pipeline currently in clinical development, analysts anticipate that the company's adjusted diluted EPS will grow by 4.1% annually over the next five years. And this conservative earnings growth estimate isn't far below the drug manufacturer industry average of 6.3%.
Amgen boasts a whopping 3.5% dividend yield, which is well above the Dow Jones Industrial Average's average 2.04% yield. Additionally, the company's quarterly dividend per share has skyrocketed in the last decade (from $0.47 per share per quarter to $2.13, a 353% rise). And if that wasn't enough to convince income investors of Amgen's quality as a dividend growth stock, similarly robust dividend growth is poised to continue.
That's because Amgen's dividend payout ratio will clock in around 47% this year. That suggests the company has the funds necessary to complete bolt-on acquisitions, execute share buybacks, and reduce its debt load while still regularly raising its dividend annually.
The valuation makes Amgen's stock a buy
Amgen is a fundamentally great company. And at the current $241 share price, the valuation isn't too shabby, either.
The stock's forward price-to-earnings (P/E) ratio of 12.6 is moderately lower than the drug manufacturer industry average forward P/E ratio of 14. This reasonable valuation further cements Amgen's buy case for dividend growth investors.
