The cost of living is getting more and more expensive. This is because inflation steadily diminishes the value of the U.S. dollar over time, and the purchasing power of said dollar as a result.
One common investing approach to combat this reality is dividend growth investing. The appeal of the strategy is that when it is done right, you filter out most of the lower-quality businesses. That is because only the best companies with growing sales and earnings can up their payouts to shareholders for years on end.
Pharmaceutical company Amgen (AMGN 0.22%) is a favorite among income investors. Here are four reasons that the stock could have a special place in a portfolio centered around dividend growth.
1. Amgen had a strong second quarter
Conducting sales operations in around 100 countries throughout the world, Amgen impacts millions of patients each year. The company's extensive reach comes thanks to its innovative therapies for diseases, such as cancer, osteoporosis, and heart disease.
In the second quarter ended June 30, Amgen's total revenue increased by 5.9% year over year to $7 billion. By itself, these results would be good enough. But it gets even better: Excluding the unfavorable foreign currency translation of 1% during the quarter due to remarkable U.S. dollar strength, Amgen's total revenue would have grown by 7%.
The Oakland-based drugmaker benefited from 11% year-over-year growth in its volume for the second quarter. This was driven by double-digit volume growth from the postmenopausal osteoporosis treatment Evenity, multiple myeloma medicine Kyprolis, and targeted lung cancer therapy Lumakras. That growth was partially offset by a 2% year-over-year decline in net selling price throughout Amgen's portfolio. This was the result of lower net selling prices for the likes of preventive migraine medication Aimovig and biosimilar medicines Amjevita and Mvasi. Finally, lower inventory levels for osteoporosis drug Xgeva and Amjevita weighed on revenue to the tune of 1% in the quarter.
Amgen's non-GAAP (adjusted) diluted earnings per share (EPS) surged 7.5% higher over the year-ago period to $5 during the second quarter. By keeping its operating expenses within reason, the company's non-GAAP net margin expanded by 60 basis points to 38.4% for the quarter. Amgen's improved profitability explains how it was able to grow adjusted diluted EPS at a faster clip than total revenue in the quarter.
Image source: Getty Images.
2. Amgen's operating momentum should continue
Amgen's impressive second-quarter results are great and all. But with the quarter in the rearview mirror, what matters most is the future. And luckily, it looks to be very bright.
This thesis is backed up by recently launched products like Amgen's asthma drug co-owned with AstraZeneca called Tezspire, as well as the Soliris biosimilar recently given the nod in Europe, Bekemv. Along with dozens of compounds in its clinical development pipeline, this should support adjusted diluted EPS growth moving forward.
3. Amgen has excellent current and future income prospects
Amgen's 3.2% dividend yield is more than double the S&P 500 index's average 1.5% yield. Having delivered 61%-plus dividend growth to shareholders over the past five years, the company is also a proven dividend grower.
AMGN Dividend data by YCharts
Best of all, Amgen's dividend payout ratio is poised to clock in below 47% in 2023. This should leave it with enough retained earnings to repay debt, hike the dividend, and expand the business.
4. Amgen has a modest valuation for a terrific business
Despite Amgen's healthy fundamentals, shares have been flat so far in 2023. Alongside increasing profits, this has sent the forward price-to-earnings (P/E) ratio down to 13.9 -- a negligible premium to the drug manufacturer industry average forward P/E ratio of 13.8. This valuation makes Amgen stock a buy for dividend growth investors.
