Gilead Sciences: Advantages Of Net Payout Yields

| About: Gilead Sciences, (GILD)


Gilead Sciences trades near multi-year lows after a Q1 earnings miss and questions regarding product sales.

The company is utilizing the stock declines and large cash flows to repurchase shares at a fast clip.

The stock now offers one of the highest net payout yields in the market.

One of the surprise outcomes of the recent decline in biotech stock prices are the yields that some of these stocks now offer. Gilead Sciences (NASDAQ:GILD) is one of the more interesting yield plays as the dividend yield is roughly 2.3%, but the stock buybacks signal a larger value proposition.

Source: Gilead Sciences website

This biotech is a very complex entity now as product sales surge beyond $30 billion and the company relies on seven drugs that exceed over $250 million in quarterly sales and a large pipeline of new drugs. Very few small investors can accurately analyze the shifting prospects of all these different drugs.

A better way to play the stock is to utilize the surging capital returns of the company mirrored with the declining stock prices as a buy signal. Historical research has shown a propensity of large cap stocks to outperform the S&P 500 when the net payout yield (net stock buyback yield plus dividend yield) is one of the biggest in the large-cap sector.

Most investors are focused on the relatively meager dividend yield, but the key to the investment thesis with Gilead Sciences is the huge stock buyback that included a $5 billion accelerated stock repurchase during Q1 at an average price of $86.68.

The company has made huge purchases in the market including significant buybacks outside the ASR during both Q1 and April. See the slide below for more details including the recent dividend hike.

Click to enlarge

Source: Gilead Sciences Q1 presentation

The interesting part of the story, especially for shareholders on the sideline, is that the stock is near multi-year lows. The company has aggressively spent over $10 billion repurchasing roughly 100 million shares in the first four months of this year while the market fears future product sales. The end result is the market selling stock to the company at ever lower prices.

GILD Chart

GILD data by YCharts

The end result is a surging net payout yield that sits at 15.3% due to the buyback yield that has reached 13.0%. The net payout yield is now one of the largest yields in the market.

Even better, Gilead Sciences had a cash hoard of $21.3 billion at the end of March. The biotech generated $3.9 billion in cash flows from operations during Q1 that along with the cash on the balance sheet will support stock buybacks going forward.

The stock trades at 7x forward EPS estimates making the stock cheap even if the market fears plateauing product sales. The Q1 earnings miss didn't help the case, hence the stock traded back down to the lows near $80.

The key investor takeaway is that investing in a company requires faith in a management team. One of the prime ways management can signal that the market is wrong about the company and stock price is to engage in large scale capital returns that are only possible in cases were cash availability is plentiful in comparison to the market valuation.

Investing based on the net payout yields concept isn't without pitfalls, but the returns are typically solid when buying stocks with market leading yields unliked by the market. Gilead Sciences is the latest addition to the concept providing an attractive entry point with the stock at 52-week lows and the company repurchasing shares at record levels.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in GILD over the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.