Viatris (VTRS 2.10%) makes both generic and branded drugs and its stock looks like a potential steal of a deal at the moment. It trades at less than 6 times its earnings, and it pays a dividend that today yields just over 5%.
But when a stock is so heavily discounted, there's usually more to the story. That could be why, at the start of 2023, investors have been dumping -- not buying -- shares of Viatris. The stock price is down 15.2% thus far in 2023 (the S&P 500 is up 2.9% by comparison).
Here's a look at what's wrong with this beleaguered stock and whether its dividend is safe.
High debt load has investors worried
Holding a lot of debt as interest rates are rising can be risky, and that's likely why investors are extra cautious when it comes to Viatris. As of the end of last year, the company's debt totaled $19.5 billion (its current assets were less than $11 billion). However, the company paid down $3.3 billion in debt last year, so Viatris' balance sheet has been improving.
NASDAQ: VTRS
Key Data Points
Interest expenses of $592.4 million in 2022 were 7% lower than the $636.2 million that Viatris incurred a year earlier. And operating income of $1.6 billion was close to three times the size of interest expenses, providing some decent coverage. But that's not a huge buffer, particularly if interest rates continue rising this year.
What does this mean for the dividend?
Despite the interest costs, Viatris posted a profit of just under $2.1 billion in 2022. On a per-share basis, that comes out to $1.71. That's more than three times what it pays in dividends ($0.48) on an annual basis. The caveat, however, is that the company's profits got a boost of around $1.8 billion due to a gain on the sale of its biosimilars business to Biocon Biologics -- that's not something investors can rely on this year.
Another way to evaluate the dividend is by looking at the company's cash flow. Accounting income, after all, includes noncash items, so it may not always be the most reliable way of checking if a dividend is safe.
Viatris spends around $145 million every quarter on its dividend. Typically it generates enough free cash flow to support the payout, but that isn't always the case. Here's how much in free cash flow has been left after the company paid out dividends over the past few years:
Fundamental Chart data by YCharts
There are often fluctuations in cash flow due to the timing of when payments flow in and out of the business. Although based on last quarter (the last three months of 2022) there may be some concerns with respect to free cash flow (it was negative), the company projects that for 2023, its free cash flow will be between $2.3 billion and $2.7 billion. Even at the low end of that guidance, Viatris would have plenty of room to pay its dividend while still potentially reducing its debt load even further.
Is Viatris stock a buy?
Given its strong free cash flow, Viatris is a dividend stock that could be well worth picking up right now. While its debt level is high, it isn't crippling the business, and the company's financials are strong enough for Viatris to support the dividend.
Buying the stock while it has taken a beating means securing a higher-than-usual yield. While the road ahead for the economy and Viatris' business may look uncertain, this could make for an underrated healthcare stock to own right now, provided that you're willing to take on some risk.
