It's been shown that dividend-paying stocks outperform their non-dividend paying counterparts, but focusing on dividends may not be the best strategy when it comes to big biotech stocks. Read on to learn why three Motley Fool contributors don't think it makes sense for these big biotech companies to pay investors a dividend.
Cheryl Swanson: Take a little trip through history with me. On April 21, 2011, Amgen (NASDAQ:AMGN) announced it would become the first big cap biotech company to pay a dividend. On that day, Amgen's stock fell 5%.
While on the very same day, rival large-cap Biogen Idec (NASDAQ:BIIB) rocketed up 21% pre-market, based on positive news about an experimental drug (BG-12) that went on to be the multibillion-dollar-selling multiple sclerosis treatment Tecfidera.
See where I'm going?
This is just one example showcasing a broader point: Biotech shares move upward by creating high-impact drugs and accomplishing high-value acquisitions, rather than distributing dollars to investors. Biogen is currently spending about $1.5 billion a year on R&D, which drove the launch of three new drugs last year. By contrast, Amgen launched one. And if that doesn't impress you, consider this: Amgen's five-year total return (from end-of-year 2014) was 201%; Biogen's was 534.9%
I love dividends, and Amgen's performance has given investors no reason to frown. But if you want me to really jump up and down, give me a biotech like Biogen that focuses its attention on increasing its share price.
Leo Sun: Some investors want Gilead Sciences (NASDAQ:GILD) to pay a dividend. Several of Gilead's smaller industry peers, including Amgen and AbbVie, pay dividends. However, Gilead prefers buybacks to dividends. It spent 34% of its free cash flow over the past 12 months to buy back $3.4 billion in stock as part of a $5 billion buyback plan it announced back in 2011.
Some investors questioned why that cash couldn't be spent on dividends, especially when Gilead's free cash flow over the past 12 months improved 173% because of strong sales of Sovaldi, its hepatitis C drug, which generated $8.55 billion in revenue (49% of its top line) during the first nine months of 2014.
However, spending on a dividend, or even a buyback, neglects the opportunity for Gilead to diversify its drug portfolio. Recall that before Sovaldi was approved, investors were worried that the 2017 patent expiration of Viread, the core drug in its HIV combo franchise, would sink the stock. Gilead avoided that fate by acquiring Pharmasset, the maker of Sovaldi and other hep-C drugs, for $11 billion in 2011. Under CEO John Martin, Gilead made around a dozen acquisitions to decrease its dependence on its core HIV drugs.
Ultimately, I'd much rather see Gilead spend more cash on R&D for new drugs and diversification via inorganic growth instead of paying a dividend.
Todd Campbell: Celgene Corporation (NASDAQ:CELG) is a market-leading player in cancer treatment with $7.6 billion in sales and a rock-solid balance sheet, but the company has far too much future growth opportunity to justify paying a dividend to shareholders.
Instead, Celgene should continue to focus on R&D, acquisitions, and collaborations. After all, that strategy has already paid off big for the company. For example, its R&D spending has rewarded investors with the $5 billion-a-year blockbuster multiple myeloma drug Revlimid and the soon-to-be billion-dollar blockbuster Pomalyst. Its $2.9 billion acquisition of Abraxis landed it the pancreatic cancer drug Abraxane that is also on track to eclipse the billion-dollar sales mark this year. And a slew of drug development deals with emerging biotech stars such as Agios suggest a steady stream of drug launches for years to come.
Those opportunities have Celgene estimating that its sales will more than double to $20 billion between now and 2020. With a track record of success as good as that, I'd be disappointed if Celgene short-changed its future growth by spending money on a dividend.
Cheryl Swanson owns shares of Agios, Celgene, and Gilead Sciences. Leo Sun has no position in any stocks mentioned. Todd Campbell owns shares of Gilead Sciences and Celgene. The Motley Fool recommends Celgene and Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.