I know you're new to the whole offering-a-dividend thing, Amgen (Nasdaq: AMGN), but I think you might have missed the part where you're supposed to generate cash to pay for them.
In a preliminary prospectus filed with the Securities and Exchange Commission yesterday, Amgen says it plans to sell bonds, the proceeds of which could potentially be used for:
- Working capital and capital expenditures
- Debt service requirements and repayment of outstanding indebtedness
- Other business initiatives, including acquisitions and licensing activities
- Repurchases of shares
- Payment of quarterly dividends
The first three make perfect sense. Grabbing cash while interest rates on corporate bonds are low to make major purchases is what smart companies do.
Borrowing to repurchase shares seems a little crazy. But it's not that different from investors buying shares on margin, which can be profitable if done right.
But borrowing money to pay dividends? That's kind of like robbing from Peter to pay Paul -- except that you don't actually have to pay Paul anything.
My first thought was that the lawyers just made the accountants shove it in there. But I checked prospectuses from experienced dividend payers in the drug space -- Pfizer (NYSE: PFE), Bristol-Myers Squibb (NYSE: BMY), and Johnson & Johnson (NYSE: JNJ) -- and none said paying dividends was one of the potential uses of the capital raised. Either Amgen's lawyers are a little more cautious than big pharma's, or the big biotech actually thinks it’s a possibility at some point.
Right now, Amgen should have no problem affording its dividend without borrowing cash. It plans to set the dividend at just 20% of adjusted net income. I'm all for hedging your bets, but in this case, the hedge seems a little unnecessary. If Amgen ran into a major problem where income dropped so low that it couldn't afford a sustained dividend without using borrowed funds, the company would likely be better off kissing the dividend goodbye than using the funds to pay investors.
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