A Stable 4% Yielder For A Panicked Market

Jun.14.12 | About: Bristol-Myers Squibb (BMY)

by Mark Goldstein

Even in the struggling world economy, Bristol-Myers Squibb (NYSE:BMY) has seen decent, steady growth over the past few years, and I believe this trend will continue over the coming years - barring a complete meltdown of the global economy. I believe Bristol-Myers' growth is sustainable, even in the face of stiff competition, thus ultimately leading in greater returns for shareholders. Therefore, I do recommend investing in Bristol-Myers Squibb now.

Other than the fact that I expect continued growth, another incentive to invest in Bristol-Myers is the healthy dividend it pays out. With a 4% annual yield, Bristol-Myers pays out about $.35 per share per quarter. The current payout ratio stands at 45%. This 4% dividend is on par with another healthcare pharmaceutical giant, Johnson & Johnson (NYSE:JNJ). Furthermore, Goldman Sachs (NYSE:GS) has reiterated its buy opinion on Bristol-Myers, due to its most recent earnings report in April.

Other than the technical indicators, one reason I expect Bristol-Myers Squibb to continue its growth is due to its continued effort to expand research and acquire what could be profitable pieces of business. Bristol-Myers Squibb and other pharmaceutical companies have submitted bids to acquire the diabetes drug maker, Amylin Pharmaceuticals (AMLN). All of the companies bid for Amylin at a value higher than $4 billion, suggesting this company is worth significant money and could add a good segment of business to Bristol- Myers, or whichever company succeeds in buying it. Investors should keep a close eye on which company does indeed come away with Amylin, as it may be poised to be a leader in diabetes treatments, a profitable and popular line in this industry.

This strive for acquiring new, successful business is a good step taken by management when a company is looking to maintain growth like Bristol-Myers Squibb is benefitting from. Similarly, Bristol-Myers Squibb's announcement of a global collaboration with leading academic institutes to further research on immuno-oncology is another good sign management is looking to take a leadership and growth position within the pharmaceutical industry.

Bristol-Myers Squibb's use of immuno-oncology, which attempts to use our knowledge of the immune system to let the immune system itself fight off cancer, was one of the biggest headlines of the American Society of Clinical Oncology's (OTC:ASCO) annual meeting. Bristol-Myers Squibb was able to show promising data for its anti-PD-1 drug; which showed promise in helping defeat lung and kidney cancer, and metastatic melanoma. Dendreon (NASDAQ:DNDN) released Provenge, a similar immunotherapy drug that fights prostate cancer, in 2010. Bristol-Myers Squibb followed the release of Provenge with Yervoy, an immunotherapy drug for advanced melanoma, which was approved last year.

Whichever company continues to successfully harness the ability of the immune system to fight off cancer, or other diseases, will have found a huge market with the opportunity to increase revenues to unforeseen levels. This potential success of Bristol-Myers Squibb in the field of immuno-oncology could pay huge returns to investors - another reason investing in Bristol-Myers Squibb is a good idea.

While Bristol-Myers Squibb has promising innovations throughout the field of pharmaceuticals, one potential setback comes from the stiff competition it faces. Bristol-Myers Squibb was only one of many pharmaceutical companies that made a splash at ASCO 2012. Johnson & Johnson created buzz with its pre-chemotherapy prostate cancer drug Zytiga. This drug has significantly slowed the growth of tumors, lengthened life, and eased the pain of cancer patients. It may only be a matter of time before Johnson & Johnson is reaping the benefits from this drug selling on the market, and moves further into immuno-oncology research.

Out of the cancer realm, but no less important for the revenue of pharmaceutical companies, is research on obesity and weight loss. If a company can find a solution to America's obesity epidemic and help those unhappy with their weight, they could also see huge growth in revenue. While Bristol-Myers is not making any headlines in this area, Arena Pharmaceuticals (NASDAQ:ARNA) is awaiting an FDA decision on the possible approval of its weight loss pill, Lorcaserin. If approved, this will be the first weight loss pill approved by the FDA in over a decade and could thus lead to huge gains for Arena and signal a lost opportunity for Bristol-Myers Squibb and others.

One setback that is undoubtedly lowering Bristol-Myers' revenues is the recent expiring of a patent for Plavix, the top of the line drug for preventing blood clots. Plavix accounted for about one third of the company's revenue in 2011, at $7.1 billion in net sales. While this does not mean Plavix will no longer be produced, it does mean a variety of cheaper, generic alternatives will be available. Bristol-Myers will certainly lose a good chunk of that $7.1 billion in sales that once came from Plavix, and will need to rely on new innovations to bring in revenue, and shareholder value. Interestingly, this year has a record 19 major patents set to expire, which could cost the pharmaceutical sector up to $38.5 billion in lost sales according to Barclays. This is just a part of the pharmaceutical industry that every company has to deal with. While the Plavix hit will hurt Bristol-Myers Squibb, it helps that other competitors are facing giant losses too.

While Bristol-Myers Squibb unquestionably faces stiff competition throughout the entire pharmaceuticals industry, I do not see any reason a potential investor should avoid this stock. While some say competition breeds excellence and success, the economist in me argues competition also breeds innovation. I like the direction Bristol-Myers Squibb management is leading the company, looking for growth opportunities and potentially profitable innovations, and this is why I recommend buying stock in Bristol-Myers Squibb.

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