Can This High-Yielding Healthcare Stock Sustain Its Dividend?

Sep.12.11 | About: Bristol-Myers Squibb (BMY)

Currently yielding a large 4.50% and trading at a reasonable 15 times earnings, Bristol Myers-Squibb (NYSE:BMY) has been a good place for income investors to park their cash and get paid. There is significant worry, however, in the minds of investors.

While the company showed solid growth in the second quarter of 2011, the company is facing patent expiration for Plavix (its heart attack and stroke prevention medication) in May of 2012, and Avapro (for hypertension). While sales won't stop completely, revenues are going to be slashed by a wide margin once these lose patent protection. Seeking Alpha's "Smith on Stocks" provides this chart of estimated sales for all of BMY's products:

(millions) FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015
Worldwide In-Line Sales
Plavix $6,146 $6,666 $7,085 $3,171 $570 $150 $75
Avapro/Avalide 1,283 1,176 $1,125 569 300 225 100
Abilify 2,592 2,565 $2,620 2,330 2,038 1,775 450
Reyatax 1,401 1,479 $1,554 1,653 1,736 1,815 1,887
Sustiva Franchise 1,405 1,368 $1,462 1,353 1,369 1,304 1,252
Baraclude 734 931 $1,117 1,171 1,272 1,382 1,502
Orencia 602 733 $854 913 1,013 1,125 1,248
Erbitux 683 662 $677 701 716 731 746
Spycel 421 573 $744 860 1,015 1,162 1,334
Ixempra 109 117 $0 169 203 238 281
Onglyza/ Kombigluze 24 158 $401 651 1,128 1,536 1,919
Mature Prodicts and Other 3,536 3,056 $2,887 2,767 2,725 2,685 2,645
Total In-Line Worldwide Sales $18,808 $19,484 20,525 16,308 14,086 14,128 13,439
New Products Worldwide
apixiban $0 $0 $10 $130 $340 $625 $1,255
Yelvoy (ipilumumab) 0 0 292 518 794 1,024 1,106
belatacept (LEA-29Y) 0 0 40 101 181 279 356
brivinib 0 0 0 45 95 176 290
dapagliflozin 0 0 0 80 140 211 279
neciltumumab 0 0 0 0 10 105 210
Recothrom 0 0 65 81 98 112 129
Total New Products Worldwide $0 $0 407 955 1,658 2,532 3,625
Worldwide Sales $18,808 $19,484 $20,932 $17,262 $15,744 $16,660 $17,064
Click to enlarge


The chart includes revenues from their (potential) blockbuster drug Yervoy (for metastatic melanoma, a very deadly form of skin cancer).

Despite a strong pipeline to at least partially replace the inevitable loss in global revenues from two of their current blockbusters, BMY will definitely see some earnings weakness over the next couple of years. The question, however, is whether Bristol-Myers can maintain, or even grow their current dividend.

Based on free cash flow, BMY's current dividend payout is a very reasonable and seemingly sustainable 50.2%. Even with a decline in revenues over the next two years (before an uptick in 2013), BMY appears very likely to maintain that yield.

Cost cutting and fewer investments should also free up cash to pay to shareholders, so they may even be able to grow the dividend on pace with inflation. If they can pull this off, the share price fluctuation is irrelevant over the next couple of years as investors will be paid handsomely for their sacrifice of rapid earnings growth. Down the line, BMY's pipeline should return their earnings to a period of solid growth, and the dividend should follow right along.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.