Drugmakers have cash and they aren't afraid to use it -- on themselves.
In February, Pfizer
Even smaller companies are getting in on the act. Amgen
Is this the best use of cash? There are certainly good arguments for issuing dividends rather than doing share buybacks, not the least of which is that it puts the cash in the hands of the investors to do as they see fit.
At this point in time though, buybacks make more sense for most drugmakers. Most pharma companies are trading at historically low valuations. Retiring shares helps boost EPS by decreasing the pie than the earnings have to be split between.
The problem with increasing the dividend rather than repurchasing shares is that many pharmaceutical companies are approaching a patent cliff. While they may have the free cash flow to increase their dividend now, that may not be the case in a few years. Pfizer will lose Lipitor to generic competition this year and Bristol-Myers Squibb
Share repurchases allow the companies to be flexible. Investors don't tend to go ballistic when companies don't issue a repurchase after finishing the last allotment like they do when a company reduces a dividend.
Cheaper than anything else?
The more important question investors should be asking themselves is whether the pharmas should be returning cash to shareholders at all. I'm not convinced that share buybacks or dividend increases are necessarily the best move.
Blasphemy, you say, it's your money and you want it one way or another?
Hold your horses. I'm not arguing they give it away or spend it on private jets for management "retreats." But there are growth opportunities in the biotech space that the drugmakers could invest in.
Yes, the companies could hand over the cash to investors and let them invest it in the likes of Human Genome Sciences
Why not let the scientists at the pharma companies scout out drugs for you? They can license them or make outright acquisitions with the dollars they would have returned to you, and you'll benefit from increased revenue and earnings.
Of course, pharmaceutical companies do this already. Bristol's recently approved Yervoy was acquired through a purchase of Medarex; Johnson & Johnson's Zytiga came from Cougar Biotechnology. I'm just advocating that pharmas and their investors might be better off if they upped the mergers and acquisitions with smaller drug developers.
What say you, drugmaker investors? How do you want your cash returned to you? Take the poll and fill in your thoughts in the comment box below.
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