Most pharma investors are familiar with power players like Eli Lilly (LLY -0.64%) and Bristol Myers Squibb, (BMY 0.96%) and both businesses have a lot to offer passive income investors too. The pair pay out reliably, and both have a habit of hiking their payments over time alongside their growing earnings.
But don't take that to mean they're of equal merit as dividend stocks, as there's a clear winner in this match-up. Let's investigate in more detail to determine which one is the better option and why.
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The case for Eli Lilly
As one of the world's most preeminent pharma conglomerates, Eli Lilly and its portfolio of products covers all sorts of illnesses, including Alzheimer's disease, diabetes, and different cancers. You've probably heard of its newer and more popular medicines like Mounjaro, which treats type 2 diabetes, and it has plenty more where that came from on the way.
But aside from its dozens of medicines on the market, Eli Lilly has four programs in registration phase, meaning that their clinical trials are already completed, and they could get approval from regulators within roughly a year. It also has 21 programs in phase 3 clinical trials, and another 21 in phase 2 trials.
Its portfolio isn't concentrated in any particular disease market, so it doesn't face a large risk of getting its entire market share eaten by any single competitor.
Plus, with so many different projects approaching maturity, it's hard to envision a future in which the company is anything other than larger than it is today. It's also safe to say that this business could experience quite a few rejections from regulators before it'd have any chance of harming the top line, simply by virtue of how much drug development activity it has going on.
Wall Street analysts generally concur with that assessment, with their average estimates pointing to $31 billion in revenue for 2023, marking 9.2% growth from its 2022 top line of $28.5 billion, and a further increase of 18.9% in 2024. Similarly, there's a high chance that it'll hike its dividend, which doubled over the last five years, and it'll probably continue regular repurchases of its shares.
At the moment, however, its dividend yield is a pitiful 1.1%, and barring a stock market crash, it probably won't get much higher than that level. So if you're impatient for passive income today, you're not going to get much bang for your buck with Eli Lilly in the short term.
The case for Bristol Myers
Much like Eli Lilly, Bristol Myers Squibb is a leading pharma company although its market capitalization of $142 billion is less than half of Eli Lilly's $382 billion. Much like you'd expect, it also has a massive product portfolio with drugs to treat everything from melanoma to stroke. It even has 28 phase 3 clinical programs and 36 in phase 2, making its late-stage pipeline significantly larger than Eli Lilly's.
What's more, its top line for 2022 was larger, with $46 billion in sales. The catch is that it doesn't have much of anything in the way of new drug launches to look forward to for growth between now and as far out as the end of 2025.
While management is looking to make bolt-on acquisitions to expand the company in the near future, it's hard to predict what that means for shareholders down the line, so it's hard to be confident in its growth prospects. As a result, Wall Street analysts are only expecting sales to rise by 1.2% in 2023, and a scant 2.3% in 2024 -- hardly the kind of growth that could lead to the strong cash flows that make for a steadily rising dividend payment.
Since the first quarter of 2013, its payout only increased by around 62%, meaning that Eli Lilly's dividend rose more in the last five years than Bristol Myers' did in 10 years. But its dividend yield of 3.3% is significantly juicer, so a similarly sized investment would generate a lot more cash if you bought it.
What's the verdict?
Overall, Eli Lilly is a significantly better passive income stock than Bristol Myers, especially for investors who are willing to hold its shares for a long period.
Eli Lilly offers a faster pace of dividend growth and likely faster revenue growth for at least the next two years due to its pipeline's probable output. And while its valuation is indeed quite a bit higher than Bristol Myers, with a price-to-earnings (P/E) ratio of 64 compared to 19, it isn't so high as to be prohibitive, given the reasonable expectation of its snappier expansion.
On the other hand, Bristol Myers' higher dividend yield makes it preferable in cases where you want more dividend income to start rolling in immediately. It's also possible that its growth rate will eclipse Eli Lilly's in the latter half of this decade, though such an outcome is far from guaranteed. For those who are extremely price-sensitive, it's also the better option.
But it's important to note that there are even higher-yielding pharma stocks at much lower valuations that could be an even better investment, like Pfizer, for example.
