Income investing is a tried-and-true investing strategy. This is because businesses that pay consistent and growing dividends to shareholders are often mature businesses that can't possibly reinvest all their profits into future growth projects.
Replacing Pfizer (PFE -1.05%) as a component of the Dow Jones Industrial Average nearly three years ago, the pharmaceutical company Amgen (AMGN -0.59%) is among the best dividend payers in its industry. But does that make the stock a buy for income investors seeking dividend growth as well?
Let's dig into Amgen's fundamentals and valuation to get an answer to this question.
Amgen's first-quarter results were fine
With around 24,000 employees in total, Amgen is a major drugmaker with a $124 billion market capitalization. The company's ground-breaking treatments help millions of patients with conditions such as cardiovascular disease, asthma, and rheumatoid arthritis.
Amgen recorded $6.1 billion in total revenue during the first quarter, which was down 2.1% over the year-ago period. But zooming in a bit on these results, they weren't as disappointing as they initially appeared. This is because the company's global operations during a time when the U.S. dollar has been stronger than other currencies resulted in a nearly 2% foreign currency translation headwind in the first quarter. Taking this into consideration, total revenue was roughly unchanged for the quarter.
Amgen's non-GAAP (adjusted) diluted earnings per share (EPS) fell 6.4% year over year to $3.98 during the first quarter. This decline in profits was caused by an uptick in operating expenses and a decrease in revenue stemming from the already-mentioned unfavorable foreign currency headwind.
Amgen is committed to innovation
Amgen's drop in adjusted diluted EPS in the first quarter doesn't look like it will persist for long. This is because the company regularly prioritizes research and development (R&D) in its corporate culture, which is evidenced by the $1.1 billion spent on R&D for the quarter. For context, this was over 17% of its total revenue.
That's why it shouldn't come as a shock to learn that Amgen has several dozen compounds in clinical development within its pipeline. The company's promising drug candidates include the heart disease drug olpasiran and its numerous biosimilars in clinical development.
Last December, the company took a step toward strengthening its drug portfolio even further with the announced acquisition of Horizon Therapeutics (HZNP) for $27.8 billion. But the Federal Trade Commission (FTC) announced this week that it would seek to block the acquisition from taking place. That's because the agency is concerned that Amgen would bundle its existing products with Horizon's thyroid eye disease therapy Tepezza and the gout medication Krystexxa to obtain advantages over rival drugmakers.
Amgen thinks it will ultimately overcome the legal challenge from the FTC and that the deal will close in December of this year. A canceled deal would weigh on the drugmaker's growth prospects, but I believe Amgen would still have enough in its pipeline to grow over time, regardless of whether this deal is ever completed.
Image source: Getty Images.
High starting income and a sustainable payout ratio
Amgen's 3.7% dividend yield is far higher than the Dow Jones Industrial Average's average dividend yield of 2.7%. And income investors will be pleased to know that the company offers more than just a generous starting dividend: Amgen's quarterly dividend per share has more than quadrupled in the past 10 years to the current rate of $2.13.
Additionally, the company's dividend payout ratio is poised to come in at just under 48% in 2023. This leaves Amgen with the capital needed to grow its business through acquisitions, repay debt, and repurchase shares. That's why I anticipate moderate dividend growth in the years ahead from the company.
Amgen is a quality company at a discounted valuation
Amgen is an all-around robust business. And at the current $233 share price, the stock also looks to be cheap. Amgen's forward price-to-earnings (P/E) ratio of 12.4 is less than the drug manufacturer industry average forward P/E ratio of 13.3. If anything, a stock of its quality arguably deserves a modest premium to its peers. This is why I continue to rate shares of Amgen a buy for dividend growth investors.
