By: Ahmed Ishtiaq
Bristol-Myers Squibb (NYSE:BMY) discovers, develops, and markets pharmaceuticals for various indications, such as cardiovascular and infectious diseases, cancer, and psychiatric disorders. The company has built some extremely impressive partnerships in the industry. In addition, BMY has established an attractive portfolio of drugs and a strong pipeline. Like many other Pharmaceutical companies, BMY faces the prospect of losing a number of patents during 2012. However, the company has drugs in its pipeline, which can fill the gap in the coming years. Furthermore, BMY has sold its non-core assets and currently focuses only on Pharmaceutical segment. As a result, the company has ample cash reserves to make acquisitions and increase its foothold in the market.
Bristol-Myers Squibb is one of the best dividend paying stocks in its industry. At the moment, the company pays an annual dividend of $1.36 per share. Based on the current market price of $31.48, the dividend yield for BMY is 4.32%. Based on earnings, the company has a trailing twelve month payout ratio of 122.5%. However, payout ratio based on free cash flows is significantly lower for BMY. At the end of last year, the company paid $2.25 billion in cash dividends and generated $4.47 billion in free cash flows. As a result, Payout ratio based on free cash flows stands at 50.33%. If we include the stock repurchase of $1.22 billion; the payout ratio will go up to 77.6%. In order to gauge the dividend stability of BMY, we will have to perform in-depth analysis of cash flows, earnings and debt.
Bristol-Myers Squibb has experienced moderate revenue growth over the past three years. At the end of 2009, the company reported revenues of $18.8 billion, which went up to $21.24 billion by the end of 2011. Net income and EPS have also followed the trend and recorded moderate growth. For the most recent quarter, the company reported non-GAAP earnings of $0.41 per share, in line with the market expectations. However, revenues for the third quarter fell short of the analyst estimates. BMY reported revenues of $3.74 billion, whereas the market expected the company to generate $4.46 billion. Revenue fell 30.1% from the same period last year. Bristol-Myers Squibb reported a net loss of $711 million, or ($0.43 per share, GAAP loss) during the third quarter. The company's loss in the latest quarter comes after the company reported profits in the three prior quarters.
BMY took a charge of $1.8 billion during the third quarter after ending work on a drug for hepatitis C. The company bought Inhibitex and its lead Hepatitis C drug for $2.5 billion. However, the clinical trials for the drug has produced adverse effects and caused one death. As a result, the company has decided bin the project and write off most of the assets it bought from Inhibitex. There is also some good news for the company; its diabetes drug Forxiga has received approval from the European Authorities. BMY has developed the drug in partnership with AstraZeneca (NYSE:AZN), and it is the first drug in SGLT2 class.
At the moment, diabetes market stands at about $26 billion, which will expand to over $50 billion by 2020. There is a huge opportunity of BMY in the diabetes market. In addition, the company may have a hope of reviving its Hepatitis treatment candidate. Recently, the company announced that a combination of its three experimental drugs cleared Hepatitis virus in 94% of participants. The company is currently competing with Abbot Laboratories (NYSE:ABT) and Gilead Sciences Inc (NASDAQ:GILD) for a slice of this $20 billion market.
The company generates impressive cash flows from operations. At the end of 2011, cash flows from operations stood at $4.84 billion. Further, the company has shown strong free cash flows over the past three years. Free cash flows for BMY have been between $3.3 and $4.47 billion in the previous three years. For the first nine months of 2012, the company has generated $6.1 billion in cash flows from operations. In addition, the company has paid cash dividends of $1.725 billion in 2012. BMY cash flows remain strong and provide adequate cover to its dividends.
In its most recent quarterly report, the company reported total long term debt of $6.6 billion. During the third quarter, BMY issued $2.0 billion worth of senior unsecured notes. One issue of $750 million is due in 2017 and carries an interest rate of 0.875%. Another $750 million issue carries a rate of 2.000% and matures in 2022. Third issue is worth $500 million, which costs 3.250% and matures in 2042.
Debt to Equity
BMY is trading at a premium compared to its peers. However, the company has extremely attractive EPS growth while industry shows negative EPS growth. In addition, BMY has impressive margins and manageable debt to equity ratio.
Bristol-Myers has changed its strategy and shed its non-core assets. As a result, the company is able to focus on the Pharmaceutical segment. At the moment, the company has potential block buster drugs in its pipeline. If its diabetes and Hepatitis drugs get approval, the company will be able to increase its revenues substantially. In addition, BMY generates healthy cash flows and its dividends are covered with free cash flows. I believe the prospects are bright for BMY, and the company should be able to maintain its dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.