We're just out of the gate of a new month and, like always, that means it's time to roll out another round of Dividend Stock Wars.
Let's get cracking…
Rules of Engagement
The concept of a stock war couldn't be simpler.
Pit two companies against one another, conduct a blow-by-blow fundamental comparison of each, and (based on the results) pinpoint the most investment-worthy stock.
We use our seven guiding principles of dividend investing - plus one more key factor - to determine the winner.
Armed with the analysis, you can then consider buying the champion - or both, if it's a close matchup.
~Round 1: Simple Business
The rule is easy: The simpler the business, the better the investment.
This holds especially true for income investing. The fewer the moving parts, the fewer the risks - and the more likely you'll be getting that dividend next quarter (and the next, and the next).
Unfortunately, Big Pharma is anything but simple. Even if the idea - develop drugs, sell to those in need - appears straightforward, it's very complicated, and very expensive, in practice.
The research, developing and testing takes lots of time and cash. And after all that expensive R&D, the product is subject to the finicky approval of the FDA.
Add to that the inevitable expiration of drug patents - upon which competition is able to roll out generic versions of once-exclusive products - and it's no wonder pharmaceutical companies have trouble keeping their pipelines filled.
In short, neither company has the edge here. Both are tied to the never-ending, circuitous pharmaceutical product cycle.
~Round 2: Steady Demand
After analyzing the simplicity of a business model, the next step is to verify that there's demand for the product(s). After all, a company needs a steady stream of cash so it can afford to pay dividends to shareholders.
But the demand, in this case, goes hand-in-hand with the product cycle mentioned above.
The reason is simple: When patents expire, and other companies introduce cheaper, generic versions of drugs, demand for the "non-generic" drugs dwindles.
One look at the revenue for both companies bears this out. Because far from displaying upward or downward trends over multiple years, revenue will rise significantly one year, only to fall the next.
Again, it's all about the drug pipeline.
Having said that, over the last three years, Pfizer managed to grow revenue by 5.6%, compared to Bristol-Myers Squibb, whose revenue actually contracted by 2.1% over the same period.
~Round 3: Price Performance
There's more to a dividend investment than just payouts, of course. We want a stock that appreciates in price, too. You can put all the money you want in my account today, but if the stock tanks, it isn't going to matter.
In the shorter term, one company leads the other significantly: Year-to-date, Bristol-Myers Squibb has posted a solid return of 32%. That's twice the gains that Pfizer claims at just 16%.
But, as always, dividend investing is about the long haul, not just the upside from a few months out of the year. And over a three-year period, both companies clock in at an almost equal basis, with Bristol-Myers Squibb returning 20% and Pfizer gaining slightly more at 23%.
Round for round, with one draw and two wins for Pfizer, Bristol-Myers Squibb has a little catching up to do.
~Round 4: High Cash Balance
Income investors should be dead certain that companies have enough of a cash cushion to sustain dividends through harder times. Because harder times always come around eventually, so the more cash-rich the company, the better.
While Bristol-Myers Squibb does have a healthy $2.7 billion in cash on its books, that's nothing compared to the mountain of dough that Pfizer is sitting on.
Its high cash balance of $33.7 billion means it could feasibly pay out five quarters' worth of dividends before hitting bedrock.
~Round 5: Minimal Need for Credit
The more pressure there is to pay down debt and reduce payments on interest, the more likely management will be to give cash distributions the shaft.
Because of the potential squeeze debt can put on cash distributions, finding those companies with manageable amounts of debt on the books should be a priority when looking for long-term dividend investments.
Well, Bristol-Myers Squibb is in need of a win, and here it is…
Compared to Pfizer's $5.2-billion worth of short-term debt and $31.5 billion in long-term debt, Bristol-Myers is saddled with far less - just $764 million and $6.4 billion, respectively.
Advantage: Bristol-Myers Squibb
~Round 6: Earnings Buffer
Just like cash, earnings can provide a buffer. We can track this buffer by calculating a company's dividend payout ratio (DPR), which is earnings per share divided by the annualized dividend.
As a general rule, I recommend investing in companies with DPRs of less than 80%. The lower the percentage, the less chance there is of a cut if earnings go south.
Bristol-Myers Squibb's DPR clocks in at a frightening 170.3% on a trailing 12-month basis. Not only is that beyond unsustainable, it's been hampering dividend growth, too - as we'll see below.
Luckily, Pfizer is in a much better situation. Over the same period, the company holds a far-lower DPR of just 60.7% - well below the recommended limit.
~Round 7: Dividend Yield and Growth
It doesn't get any more basic than yield and growth, so I'll spare you the 101…
While both Pfizer and Bristol-Myers sport comfortably above-average yields - 3.35% and 3.24%, respectively - as I indicated previously, Bristol-Myers has a sustainability problem on its hands.
And it's showing. Over the last three years, the company has barely managed to raise dividends 3% annually on average. That's "growth" in name only.
Pfizer, on the other hand, has been increasing payouts annually by an average of 10.33% over the same period.
~Round 8: Valuation
Last, but not least, it's always prudent to make sure you're not overpaying.
Unfortunately, given the fact that the S&P 500 average price-to-earnings (P/E) ratio is 16.6, Bristol-Myers Squibb looks painfully expensive.
At present, it's trading at a massive 52.1 times earnings. That's simply beyond the pale, especially considering that, when it comes to investing for income, anything above a P/E ratio of 20 is usually foolish.
Once again, Pfizer excels where Bristol-Myers lags behind. Currently trading at 18.9 times earnings, it's relatively in line with both the S&P 500 average P/E and the industry average of 16.1.
Let's Go to the Scorecard…
After eight rounds, it's safe to say that Pfizer absolutely wiped the floor with Bristol-Myers Squibb. The latter managed to win only a single round, with one draw between the two companies.
In the final analysis, as a dividend investment, Pfizer shows itself to be superior in almost every respect.