Amgen (AMGN 0.22%) is a global leader in biotechnology, with a market capitalization of over $121 billion. The company has a proven track record of developing breakthrough therapies for challenging diseases and has been rewarding its shareholders with dividends since 2011.
Amgen's dividend has grown by a remarkable 353% over the past 10 years, reaching $2.13 per share in the first quarter of 2023. The company's annualized dividend yield is currently 3.8%, which is among the highest within the large-cap biotech space. As a result, Amgen has become a top dividend stock for many individual and institutional investors.
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But how reliable is Amgen's dividend? Can the company maintain its dividend growth in the future, or will it encounter difficulties that could threaten its payout? Here is an analysis of Amgen's earnings potential, payout ratio, and financial position in relation to its dividend policy.
Is Amgen's dividend on solid financial ground?
Earnings: Like most companies, Amgen's quarterly earnings are the primary source of its dividend payments. The company's earnings per share (EPS) have increased by an average of 13.2% annually over the past 10 years. Amgen's EPS growth has been driven mainly by its portfolio of branded products, which includes blockbuster drugs such as Enbrel, Neulasta, Prolia, and Otezla. The company also has a robust portfolio of newer drugs that could fuel future growth, such as Lumakras, Repatha, and Aimovig.
AMGN EPS Diluted (TTM) data by YCharts
However, Amgen is also facing significant challenges from patent expirations and biosimilar competition. As a result, the company's earnings per share are expected to remain flat in 2023. In 2024, Amgen is projected to grow its EPS by 6.2%, which is lower than its historical average. The long and short of it is that the biotech is entering a period of slower-than-normal earnings growth that may persist until it lands another all-star drug through either a bolt-on acquisition or organic pipeline development.
Payout ratio: Amgen's dividend payout ratio, which measures the percentage of its earnings it pays out as dividends, is currently 54%. A lower payout ratio indicates a higher margin of safety for the dividend because it leaves more room for the company to absorb any earnings shocks or declines. Amgen's payout ratio is slightly higher than the average of its closest peers in biotech, which is around 50%.
However, this does not necessarily imply a higher risk for the dividend. Amgen is a well-established and profitable drug manufacturer, with a relatively strong clinical pipeline and a highly diversified product portfolio. Moreover, several top drugmakers have maintained their dividend programs with far higher payout ratios in the recent past.
Cash flow: Amgen's cash flow is another important factor that affects its dividend safety. The company's cash flow from operations (CFO) measures the amount of cash it generates from its core business activities. The company's free cash flow (FCF) measures the amount of cash that it has left after paying for its operating expenses and capital expenditures (capex). The company's FCF is the main source of its dividend payments, as well as its share buybacks and debt repayments.
Amgen's CFO has grown by an average of 5.4% annually over the past 10 years. Its FCF has increased by an average of 6.5% annually over the same period. Amgen's FCF growth has been supported by its strong earnings growth, as well as its efficient capital allocation and cost management. The company has invested heavily in research and development to fuel its pipeline, while also maintaining a disciplined approach to capex and operating expenses.
AMGN Cash from Operations (Annual) data by YCharts
Amgen's dividend payout ratio based on FCF, which measures the percentage of its FCF that it pays out as dividends, is currently 47%. On this metric, Amgen comes in well below average for its peer group, which is around 70%.
Balance sheet: Amgen's balance sheet is another key factor that influences its dividend safety. A business's balance sheet reflects its financial position and strength, as well as its liquidity and solvency. The company's debt-to-equity ratio (D/E) measures the amount of debt it uses to finance its assets relative to its equity.
Amgen's D/E ratio is currently 11.36, indicating the company has an extremely high level of leverage, which increases its financial risk and obligations. Amgen's D/E ratio is considerably higher than the average of its peers, which is around 0.73.
Verdict
Amgen's dividend screens as fairly safe based on its earnings power, cash flow, and balance sheet. The company has a strong track record of dividend growth, supported by its solid portfolio of products and innovative pipeline.
Amgen also has a high margin of safety for its dividend, as it pays out less than half of its FCF as dividends. So, as things stand now, the company ought to be able to continue boosting its quarterly payments to shareholders.
That being said, investors will definitely want to keep an eye on the biotech's business development activity. Additional debt from bolt-on acquisitions or pricey licensing deals could put increased pressure on its highly levered balance sheet, which may force it to use a heavier portion of its FCF to pay down debt and cover interest payments.
