Amgen has decided to issue its first-ever dividend, starting in the second quarter of this year. But while Amgen's payout ratio looks easily manageable, rival Merck's is disturbingly high.
Source: Yahoo! Finance and Capital IQ, a division of Standard & Poor's.
It's not like Amgen couldn't afford to throw a bone to its investors. Last year it had free cash flow of more than $5.2 billion, and that's on top of the almost $17.5 billion it's socked away over the years. With Amgen finally distributing some of its income to its loyal stockholders, only one of the 10 largest-capitalized health-care companies still isn't paying a dividend: Gilead Sciences
Money laundering, Wall Street style
The quandary for Amgen -- akin to the one facing illegal drugmakers -- was what to do with all that cash. There were reports last fall that the company was ready to spend $9.8 billion on Swiss drugmaker Actelion. That rumor caused grumbling among investors who were sick and tired of watching Amgen's share price fall by a third since 2006. So in addition to a dividend of up to 20% of net income to appease shareholders, Amgen will also buy back as much as $5 billion worth of shares -- on top of more than $2 billion of previously authorized buybacks.
Drugmaker, heal thyself
Another dimension to Amgen's decision to finally reward its shareholders was that two of its drugs took hits, causing the share price to stumble. Investors feared that the FDA would require the company to lower the labeled dose of its Epogen anemia drug for dialysis patients. They're also worried that Arenesp, its newer drug for anemia, has been linked to cardiovascular complications.
To inoculate itself from its own somewhat anemic share price, the company has finally, I think, come up with the right cure for shareholder indifference. The prescription: dividend + (less shares) = higher share price. But don't call me if it doesn't get better by morning.
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Fool Contributor Dan Radovsky owns shares in Amgen and Lilly. Motley Fool newsletter services have recommended buying shares of Gilead Sciences and Pfizer. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.