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By: Ahmed Ishtiaq

Bristol-Myers Squibb Company (BMY) is one of the best dividend paying stocks in the Biotech sector. The company pays an annual dividend of $1.36 per share and yields 4.23% based on the current price. In the current low interest rate environment, dividend stocks are extremely attractive investments. However, it is important to choose stocks that can maintain or increase current dividend levels. Solid free cash flows are vital for any company to maintain or increase its dividends. In my previous article, I looked at the earnings, cash flows and debt of the company. However, I have decided to go deeper in my analysis of free cash flows in this article. All the data used in the analysis was taken from the SEC filings of the company.

Free Cash flows:

Free Cash Flows

TTM

2011

2010

2009

Net Income

$2,808

$5,260

$4,513

$11,862

Depreciation and other noncash charges

$108

$897

$699

$8,185

Funds from Operations (FFO)

$2,700

$4,363

$3,814

$3,677

change in noncash current assets

$3,758

$265

$488

$788

change in noncash current liabilities

$1,256

$364

$256

$364

Operating Cash flows

$7,714

$4,992

$4,558

$4,101

Capital Expenditures

$507

$367

$424

$730

Free Operating Cash Flow

$7,207

$4,625

$4,134

$3,371

Long Term Debt

$6,608

$5,376

$5,328

$6,130

In the previous three years, net income of the company has demonstrated a mixed trend. At the end of 2009, net income stood at $11.862 billion, which came down to $4.513 billion in 2010. However, the company had strong operations in 2011, and net income recovered slightly. BMY funds from operations are extremely impressive and have increased over the past three years. However, trailing twelve month (TTM) net income and FFO figures are disappointing for the company.

On the other hand, cash flows from operations demonstrated impressive growth over the last three years. At the end of 2011, cash flows from operations stood at just below $5 billion as compared to $4 billion at the end of 2009. Capital expenditures are not a significant element on the books of the company, and in the previous three years, the company spent a total of $1.5 billion. However, BMY has increased capital expenditures during the past twelve months. As a result of solid cash flows from operations and low capital expenditures, the company has impressive free cash flows. There has been healthy growth in free cash flows over the past three years, especially in the last twelve months. Free cash flows in the last twelve months have gone above $7 billion, rising by almost 61% from the start of the year.

Essential Ratios:

Essential Ratios

TTM

2011

2010

2009

Funds from Operations(FFO)/Total Debt

0.41

0.81

0.72

0.60

FFO/Capital spending requirements

5.33

11.89

9.00

5.04

Free Operating Cash Flow + interest expense/ Interest expense

42.66

32.90

29.51

19.32

Debt Service coverage

7.99

18.35

16.33

8.57

The first ratio shows that coverage provided to debt by FFO has improved over the past three years. The ratio for BMY has improved substantially to 0.81 at the end of 2011, compared to 0.60 in 2009. FFO to total debt ratio indicates that the firm generates enough funds from operations to cover its total debt. However, due to a fall in FFO during the past twelve months, the ratio has come down to 0.41. The second metric in the table (FFO to capital spending requirements) shows that the capital spending requirements of the company has been appropriately covered through internally generated funds. In fact, the ratio has improved over three years, indicating the firm is in a stronger position to fund its capital spending requirements.

BMY free cash flows increased during the past three years, which resulted in an increase in free cash flow coverage ratio. At the moment, free operating cash flows to interest expense coverage is extremely impressive, meaning the company should not face problems meeting its interest expense. Finally, the debt service coverage ratio for the company is solid, and it should not face any trouble meeting its debt servicing needs. Overall, the metrics indicate the firm is in excellent financial position.

Competition:

Bristol-Myers Squibb competitors include Pfizer Inc (PFE), Merck & Co Inc (MRK) and GlaxoSmithKline PLC ADR (GSK).

BMY

PFE

MRK

GSK

P/E

28.10

20.4

19.50

13.50

P/B

3.70

2.2

2.40

10.70

P/S

2.80

2.8

2.80

2.50

EPS Growth

17.00%

-2.30%

-17.80%

5.40%

Operating Margin

16.90%

25.60%

18.60%

27.60%

Net Margin

10.00%

15.80%

14.20%

18.60%

ROE TTM

12.40%

12.20%

12.20%

72.50%

Debt to Equity

0.50

0.4

0.30

2.10

Source: Morningstar.com

BMY is trading at a premium compared to its peers. However, the company has extremely attractive EPS growth while the industry shows negative EPS growth. In addition, BMY has impressive margins and manageable debt to equity ratio.

Summary:

According to my analysis, the company should be able to maintain its current level of dividends. BMY generates impressive free cash flows that provide solid coverage to its dividends. For the past twelve months, the dividend payout ratio based on free cash flows is around 32%. Trailing twelve months cash dividends for BMY were $2.2 billion whereas free cash flows stood at over $7 billion. The company has a great portfolio of drugs and a solid pipeline, which should increase its cash flows in the future.

Source: Bristol-Myers Squibb Demonstrates Impressive Cash Flows