As dividend investors know, there's an upside to investing in a big pharmaceutical business like Amgen (AMGN 0.22%) for dividend income. It likely has the resources and proven capabilities that'll enable it to stick around, and remain profitable enough to pay off its shareholders for years and years.
While the cash payoffs might be initially smaller than you'd find with another type of equity, like a real estate investment trust (REIT), the upside is that the risks may be lower too. So with that in mind, let's evaluate Amgen to see if it's a smart choice for your dividend income portfolio right now.
There's a lot to like here
Does Amgen have what it takes to be a stable source of cash flow? In a word, yes. Here's why.
Its product lineup features medicines that treat a range of different conditions with no clear theme, ranging from Prolia, for postmenopausal osteoporosis, to Mvasi, for various cancers. Sales of those drugs are how it generated trailing-12-month net income of $7.6 billion. Furthermore, this diverse product mix could be favorable, as it dramatically reduces the chance that a single new drug made by a competitor could harm multiple segments of its revenue at once.
Its late-stage pipeline is somewhat less eclectic, with a bevy of programs for inflammation and different indications in oncology representing the majority of its projects. Both inflammation and oncology are hot areas with an abundance of different niches, which means there's a high chance the business will be able to find a home for its new medicines even if the competition is fierce. And as much as we might wish otherwise, there will almost certainly be an ongoing demand for therapies in both of those segments, as neither inflammation nor cancer will be fully addressed anytime soon. That's another factor pointing to this stock having staying power.
At the moment, Amgen's forward dividend yield is 2.9%. That puts it well above the broader market's average dividend yield of 1.5%, but still a bit short of what one would consider to be a high-yield dividend stock.
But for long-term shareholders, the upside is likely to be significant. Over the last five years, Amgen hiked its quarterly dividend at an average annual rate of just over 10%, and it has an uninterrupted streak of raising its payment every year over the last 12 years. Plus, it only pays out around 59% of its earnings, so there's plenty of room for it to keep hiking its payout, even if net income falls somewhat. So the financial metrics look good, too.
Be mindful of your expectations
As favorable as Amgen's future looks in the long term, be aware that it probably won't be an investment that makes you a millionaire overnight. It simply won't grow fast enough.
A key reason is that it only spends around 15.6% of its quarterly revenue on research and development (R&D), which worked out to be close to $1.1 billion in the most recent quarter. That's significantly lower as a proportion of sales than most of its big pharma peers. For instance, Eli Lilly spends 25.3% of its revenue on R&D; as a consequence, Lilly's pipeline is larger, featuring more programs at every stage of clinical trials, which gives it more chances to generate additional revenue by commercializing new medicines over time.
Nonetheless, that doesn't rule Amgen out as being a good dividend stock. At present, there are no major competitive or financial threats looming, and there's a high probability that Amgen will be able to keep developing and launching new medicines at an acceptable pace to maintain and expand its dividend. So if you're looking for a solid dividend investment that's ripe for holding a long while, this could well be it.
