Have $1,000 to Invest? This Dirt Cheap Pharma Stock Pays You 4.2% to Wait.
Key Points
Bristol Myers Squibb has a moderately high forward dividend yield, but that's not the main appeal with this undervalued pharmaceutical stock.
If the company makes further progress replacing legacy drugs that have or will soon go generic with new successful products, shares could experience a rerating.
With pharma stocks with stronger investor sentiment trading for 15 to 20 times forward earnings, if not higher, this blue chip dividend stock has ample price appreciation potential.
Bristol Myers Squibb (NYSE: BMY) has one of the highest dividend yields among major pharmaceutical stocks. At current prices, its shares have a forward yield of around 4.2%. However, consider the yield not as the sole reason to buy, but as an incentive to wait until the company's turnaround is complete.
While the company faces major patent-exclusivity losses in the coming years, the success of Bristol Myers Squibb's "growth portfolio" could offset them. The resulting ease of uncertainty could lead to a rerating of shares.
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Bristol Myers Squibb, a $1,000 investment, and downside risk
A $1,000 investment in Bristol Myers Squibb gets you approximately 16 shares. Based on $2.52 per share in cash dividends over the next four quarters, your investment of around $956 will generate about $40 in annual dividend income.
Yes, $40 hardly moves the needle. Also, this moderately high dividend likely wouldn't offset losses if the stock were to experience a dividend cut or suspension. However, who's to say Bristol Myers Squibb faces such yield-trap risk? Given that Bristol Myers Squibb's growth portfolio is already offsetting legacy drug sales, this stock currently has a payout ratio of less than 40%, strongly suggesting the dividend remains safe in the near term.
The big potential payoff
There is substantially greater upside potential when it comes to a Bristol Myers Squibb rebound. As concerns about Bristol Myers Squibb's patent cliff issues persist, shares continue to trade at the low end of the valuation range among pharma stocks.
However, if subsequent results provide greater certainty that the growth portfolio is making up for declining Revlimid sales, as well as for anticipated future declines in Eliquis and Opdivo sales once these drugs go generic, this stock could rerate in a big way. Trading at under 9.5 times forward earnings today, but with competing pharmaceutical companies facing less intense patent-cliff uncertainty trading at 15 to 20 times forward earnings, if not higher, this stock has much room to run if sentiment keeps improving.
Thomas Niel has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.