Buying individual stocks can be a smart way to build wealth over time. However, the reality of the situation is that it's exceptionally difficult to consistently beat the market averages over time. One way to increase your odds of success is to buy shares of high-quality companies that sport strong competitive advantages, solid growth prospects, and attractive valuations. Biotech giant Amgen (AMGN 0.22%) ticks many of these boxes. Read on to find out more about this top dividend-paying biotech stock.
Competitive moat
Amgen has several competitive advantages that make it stand out from its peers in the biotech industry. First, Amgen has a diversified portfolio of products that span multiple therapeutic areas, such as oncology, cardiovascular, immunology, nephrology, and neuroscience.
Some of its leading drugs include Enbrel, Neulasta, Prolia, Xgeva, Otezla, and Repatha, which encapsulate a wide variety of conditions and market opportunities. These drugs also generate billions of dollars in annual revenue in aggregate and have strong market positions in their respective segments.
Second, Amgen has a robust pipeline of new drugs that can drive future growth. Amgen has over 40 molecules in clinical development, with 20 compounds in late-stage development. Some of the most promising candidates include the cardiology drug olpasiran and the cancer drug bemarituzumab. These clinical candidates have the potential to address large unmet medical needs and generate significant sales if approved.
Third, Amgen has a proven track record of innovation and scientific excellence. Amgen has been at the forefront of biotechnology research and development for over 40 years and has pioneered many breakthroughs in the field.
For example, Amgen was among the first companies to develop and commercialize recombinant human erythropoietin (EPO) for anemia, recombinant human granulocyte colony-stimulating factor (G-CSF) for neutropenia, and monoclonal antibodies for cancer and inflammatory diseases. Amgen has also invested heavily in cutting-edge technologies such as gene editing, bispecific antibodies, and cell therapy.
Growth Prospects
Amgen has a decent near-term growth outlook. Although analysts expect Amgen to post negative top-line growth in 2023, the biotech is forecast to return to mid-single-digit growth in 2024. The main drivers behind Amgen's return to form will be its newer lineup of products and line extensions, such as the KRAS inhibitor for lung cancer known as Lumakras, and the asthma drug Tezspire.
Amgen's recent acquisition of Horizon Therapeutics (HZNP) is also expected to contribute positively to the biotech's top- and bottom-line growth over the balance of the decade, although the Federal Trade Commission is currently challenging this deal.
If this bolt-on acquisition falls through, Amgen will probably pursue alternative options to further boost its pipeline and product portfolio. The biotech, after all, is entering a challenging period characterized by multiple patent expires, price compression, and the advent of potent new competitors in high-value areas such as immunology and cancer.
Valuation and dividend
Amgen stock is currently trading at a reasonable valuation compared to its peers and the broader market. As of Aug. 21, Amgen stock was trading at 13.9 times projected earnings. By comparison, the average large-cap pharma stock currently trades at 18.2 forward earnings, and the average S&P 500-listed equity trades at 19.6 times projected earnings.
On top of its attractive valuation, Amgen also offers a generous dividend yield of 3.23%, which is higher than the industry average of 1.5% and the S&P 500 average of 1.54%. The biotech has been raising its dividend since 2011 and has a payout ratio of 54.8%, which leaves room for further growth.
The one wild card is its future business development activity. Another large deal in excess of $10 billion -- on top of this proposed Horizon Therapeutics transaction -- could force management to rethink its capital allocation strategy, including its shareholder rewards program.
Speaking to this point, Amgen's debt-to-equity ratio of roughly 907% is far from ideal, and additional debt will only exacerbate the problem. De-leveraging, in turn, will more than likely become a top priority for the biotech in the second half of the decade.
Verdict
Amgen screens as a top buy-and-hold stock for long-term investors looking for a combination of growth, income, and value. The company has several competitive advantages that give it an edge over its rivals, a robust pipeline that can fuel future growth, along with a reasonable valuation. Lastly, Amgen pays a reliable and growing dividend that can reward shareholders while they wait for the company to move beyond its patent headwinds.
