Investors in Gilead Sciences (GILD) have had quite a run over the past decade. From 1996 through 2008, GILD shares posted gains every single year. During that same 13-year period, the Dow Jones index only posted gains in 8 years. The other 5 years the Dow posted some significant losses.
Investors who purchased GILD shares at the beginning of 1996 have experienced a phenomenal 5,922% return. It seemed like the stock could only climb higher each year and the stock split four times from 2001-2006.
However, last year while the S&P 500 index was gaining nearly 24%, Gilead Science shares dropped 15%. That negative trend has continued in 2010 with the stock plunging another 18% (despite the broader markets being flat).
Gilead Sciences is a cash flow machine and generated $3.1 billion in operating cash flow in 2009. However, investors are dumping the stock given the concern that the biopharmaceutical firm can no longer deliver growth rates that investors have been accustomed to in the past.
Despite the company’s cash generating ability, the stock has never paid a quarterly dividend. Instead they relied on growth investors who are now fleeing the stock. GILD shares are only trading at 9x consensus 2011 EPS estimates, but value investors aren’t jumping in yet.
Should Gilead Sciences declare a dividend to entice value investors?
Last month, the firm announced a $5 billion share repurchase program. However, dividend investors value a quarterly dividend higher than share repurchases. In addition, the share repurchase program stretches through 2013 which will likely minimize any short-term impact on the stock price.
Top competitors Bristol-Myers Squibb (BMY) and GlaxoSmithKline (GSK) both offer dividend yields above 5%. Both stocks have also outperformed GILD over the last two years (especially when taking the dividend payments into account).
Wall Street expects Gilead Sciences to earn $3.62 per share this year. If GILD was to target even a marginal 20% dividend payout ratio, the stock would yield 2%. A 2% yield for a stock with significant future growth opportunities would definitely cause dividend investors to take notice.
Disclosure: No positions