Bristol Myers Squibb (BMS) (BMY 1.30%), a multinational pharmaceutical company, has all the hallmarks of a top-shelf dividend stock. The company has boosted its dividend for 14 consecutive years, has paid a dividend for 91 straight years, and offers a highly attractive yield of 3.57% at current levels.
These top-line metrics, however, don't tell the full story. BMS is a company in transition. This November, the company's longtime Chief Executive Officer Giovanni Caforio plans to step down, making way for Chief Commercialization Officer Chris Boerner to take the reigns as the pharma-giant's new leader.
Moreover, BMS is in the midst of a volatile portfolio reset. Specifically, the company is bracing for the impact of several major patent expirations this decade for cornerstone growth drivers like Revlimid, Opdivo, and Eliquis.
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While the company's deep clinical pipeline and recent business activities have brought multiple new growth drivers online, such as the heart drug Camzyos and a spate of hematological offerings, some analysts think the best-case scenario is essentially flat top-line growth throughout 2025 to 2030. Bristol, for its part, has forecast low- to mid-single-digit revenue growth over this period.
Is BMS worth the risk for income investors? Let's dig deeper to find out.
BMS: An unbaked pie
With a forward-looking earnings yield of 12.7%, BMS is easily one of the cheapest dividend-paying healthcare stocks right now. This fact is a testament to Wall Street's rather cautious approach to the company's ongoing battle with the patent cliff.
After all, BMS still derives the bulk of its revenue from a small handful of aging drugs. The immuno-oncology blockbuster Opdivo, for instance, accounted for 16.5% of the drugmaker's total revenue in the first quarter of 2023.
With this revenue concentration risk on full display, management has repeatedly stated it plans on addressing this issue by acquiring one or more late clinical-stage or early-stage commercial assets. Indeed, BMS was recently linked to a possible deal with Prometheus Biosciences (NASDAQ: RXDX) for its promising immunology assets but ultimately lost out to Merck. Although BMS missed out on Prometheus, this rumored deal reinforces the notion that a mid-sized acquisition is highly likely in the company's near future.
The good news is that the drugmaker has the financial firepower to pursue a bolt-on acquisition while continuing to feed its dividend program. Speaking to this point, BMS exited the most recent quarter with over $9 billion in cash and cash equivalents. Meanwhile, it also generated almost $3 billion in free cash flow during the three-month period.
The one drawback is that BMS' costly acquisition of Celgene a few years back will probably curtail its ability to engage in a bidding war for the most coveted assets -- a fact that likely influenced the outcome of its pursuit of Prometheus. After all, BMS has been busy deleveraging its balance sheet since this transaction, with the company spending another $1.6 billion on debt reduction in the first quarter of 2023.
What's the key takeaway?
If you're simply looking for an above-average dividend yield, BMS stock is definitely worth checking out. Even if the company's free cash flow and annual revenue move sideways for the remainder of the decade, its hefty dividend should be a safe bet.
BMS sports a fairly reasonable trailing-12-month payout ratio of approximately 64%. Its shares are also ridiculously cheap, implying that most of the downside risk is probably baked in at this point. And that's where the opportunity lies.
BMS could execute a course-altering acquisition soon without putting its dividend program at risk. That's an intriguing proposition. With a $10 billion upper limit, BMS could pursue a host of metabolic disorder specialists with enormous upside potential or perhaps dive deeper into the cardiovascular arena via a gene-editing company. The point is that there are a surfeit of budget-friendly merger and acquisition targets in biopharma right now.
All told, BMS stands out as an overall solid dividend stock with the potential to morph into a strong growth play later this decade.
