Before income investors put down their hard-earned money on a stock, they need to ask themselves a simple question: Based on my due diligence, do I have the utmost confidence that this company can pay dividends for many years to come?
If the answer isn't an emphatic yes, it may be better to pass on the stock altogether. The pharmaceutical industry is known for sometimes being quite lucrative. But the challenging side to the industry is that companies often live and die by drug patents. This variability can be detrimental to paying a sustainable dividend to shareholders.
Since going public in 1933 amid the Great Depression, Bristol Myers Squibb (BMY 0.34%) has consistently paid dividends for the last 90 years. The company arguably has the track record to elicit a yes to the above question. But is the stock a buy right now? Let's investigate Bristol Myers' fundamentals and valuation to find an answer.
Having what it takes to navigate choppy waters
With products helping to tackle dozens of diseases in therapy areas such as hematology, immunology, and neuroscience, Bristol Myers is a balanced business. This is why it shouldn't be surprising to learn that the company's $127 billion market capitalization earns it the status of being the ninth-biggest drugmaker in the world.
Bristol Myers' revenue declined by 5.6% year over year to $11.2 billion in the second quarter, ended June 30. Adjusting for unfavorable foreign currency translations stemming from a stronger U.S. dollar, the company's constant currency revenue dipped by 5% during the quarter. A revenue drop isn't exactly what investors like to see from their investments.
| Bristol Myers' Top-Selling Drugs | Q2 2023 Revenue (in Millions) |
|---|---|
| 1. Eliquis | $3,204 |
| 2. Opdivo | $2,145 |
| 3. Revlimid | $1,468 |
| 4. Orencia | $927 |
| 5. Pomalyst/Imnovid | $847 |
Data source: Bristol Myers Squibb.
But after years of consistent top-line growth, even the best pharmaceutical companies experience these downturns. This is because sales declines for a top-selling product can come faster than expected. That's precisely what happened with Bristol Myers' cancer drug Revlimid, which started facing generic competition last year. Revlimid experienced a 41.3% plunge in revenue for the quarter -- an acceleration from the year-ago period decrease of 21.9%.
Recently launched drugs like anemia therapy Reblozyl and immunology treatment Sotyktu, as well as growth in other top-selling drugs like Opdivo and Orencia, weren't enough to offset generic erosion related to Revlimid. Bristol Myers' non-GAAP (adjusted) diluted earnings per share (EPS) fell by 9.3% over the year-ago period to $1.75 in the second quarter.
Due to its lower revenue base, the company's non-GAAP net margin contracted by 220 basis points to 32.7% during the quarter. Bristol Myers' lower profitability was only partially offset by a moderate reduction in its diluted share count as a result of share buybacks. That explains how adjusted diluted EPS shrank at a faster rate than revenue for the quarter. Still, the company reiterated its financial target of low- to mid-single-digit annual constant currency revenue growth from 2020 to 2025.
Despite challenges, it isn't hard to see why the company remains optimistic. Bristol Myers has fast-growing new products like Reblozyl and cancer therapies Abecma and Opdualag to help counter the diminishing loss of exclusivity product revenue. That, along with dozens of compounds in its pipeline that could be eventual contributors, bodes well for the company's long-term outlook.
Image source: Getty Images.
A big -- and sustainable -- dividend
Bristol Myers' 3.7% dividend yield is well above the S&P 500 index's 1.5% yield. But this elevated yield doesn't appear to be a red flag.
That is because, with the dividend payout ratio set to register at less than 34% in 2023, there is still plenty of coverage for the dividend. As Bristol Myers ramps up growth for recently launched products and launches more products, the payout should remain easily supported by earnings.
A beaten-down valuation
The 15% slump in Bristol Myers' stock so far in 2023 could be viewed one of two ways: A sign to head for the exit or a chance to buy a solid business at a cheap valuation. Looking beyond the most recent quarter, I view it as the latter.
After all, Bristol Myers' forward price-to-earnings (P/E) ratio of 7.7 is much lower than the drug manufacturer industry average of 13.1. This prices in most, if not all, the risks that the company could face moving forward, which makes it an intriguing income stock at the current $61 share price.
