Some investors view growth or momentum stocks as the key to multi-bagger returns. Others prefer to deep-sea dive for beaten-down assets with rebound potential. The compounding effect of dividend reinvestment over enough time can potentially make it possible to turn $100,000 into a cool million.
So, could this work with roundly unpopular Bristol Myers Squibb (BMY -0.18%) stock? It's an unusual place to mine for millionaire-maker prospects, but Bristol Myers stock is out of favor, and this ought to pique contrarians' interests.
However, before jumping into the trade in hopes of 10x returns, look beyond the share price and dividend yield and consider why investors found fault with Bristol Myers.
A massive but fully expected loss
First things first. Even with the compounding effect of a dividend-reinvestment strategy, it would take an awfully long time to turn $100,000 into $1 million solely through Bristol Myers' 5%-ish annual dividend yield. Besides, dividends aren't just free money since a share's value is reduced by the amount of each dividend payment. So, significant share-price appreciation would be needed to achieve millionaire status with Bristol Myers stock.
Additionally, part of the reason the dividend yield has gone up to 5%-plus is that the share price has gone down so much. It's a veritable bloodbath, with Bristol Myers stock being cut nearly in half since November 2022.
Contrarian investors shouldn't immediately start salivating here; sometimes, beaten-down stocks are cheap for a reason, as the old saying goes. In Bristol Myers' case, it appears the market just isn't on board with the company's spend-today-to-profit-later strategy.
Revenue growth doesn't seem to be a problem for Bristol Myers. The company's first-quarter 2024 revenue increased 5% year over year to $11.87 billion, beating Wall Street's consensus estimate of $11.45 billion.
What's off-putting to some stock traders is that Bristol Myers has spent a whole lot of money lately. It's been on a downright buying spree, having acquired Karuna Therapeutics, RayzeBio, Mirati Therapeutics, and SystImmune. With that, Bristol Myers incurred sizable expenditures -- to the tune of $6.30 per share in Q1 2024 -- associated with acquired in-process research and development (acquired IPRD) and licensing income.
This was certainly no surprise to Wall Street, as analysts expected Bristol Myers to sustain a first-quarter net loss of $4.43 per share despite the company's revenue growth. The drugmaker eked out a slight beat as the company only lost $4.40 per share, but that's probably not something to brag about.
Saving money, losing investors
Along with its quarterly report, Bristol Myers disclosed plans to cut 2,200 jobs this year. It's also eliminating some drug-development programs and taking other measures -- all part of a strategy to save $1.5 billion in expenses by the end of 2025.
That announcement, in conjunction with the company's recent spending spree, may have caused some shareholders to jump ship. Sticklers for fiscal discipline perhaps didn't want to hear that Bristol Myers intends to "reinvest" (i.e., spend) the "majority of" the $1.5 billion in eventual cost savings "to fund innovation and drive growth."
Now, the drugmaker has the herculean task of convincing the market that this money will be well spent. For what it's worth, long-term investors can at least forgive management's steep downward revision in 2024 earnings guidance. The company lowered its outlook from a range of $7.10 to $7.40 per share to a new range of $0.40 to $0.70 per share -- but again, that's mainly due to one-time charges.
Since Bristol Myers still has some convincing to do, it doesn't make sense to expect $100,000 worth of Bristol Myers stock to turn into $1 million within any reasonable amount of time. A more sensible objective would be to grow one's investment gradually, based on the premise that Bristol Myers can get some of its lost investors back in the fold and even gain some new ones.
The market may have already priced in a worst-case scenario of Bristol Myers. Demonstrating discipline could, in due time, get the stock out of the doghouse.
