I am looking at a growth stock that just so happens to be a dividend stock. The overlap between these two types of stocks is already small, but when you add "biotech" into the mix you get only one stock that really fits in all those categories: Amgen (NASDAQ:AMGN). I previously covered this unicorn in an article that focused on the stock's valuation, leaving readers with a chart and a promise to continue the analysis with a look at the dividend.
Here's the chart I asked readers to ponder:
I find this chart very exciting. We see stable growth in the dividend that almost perfectly keeps pace with the stock growth; the only burps can be easily explained by a volatility that's necessarily higher in the stock price than in the management-defined dividend income. At present, the dividend income for investors is nearly at the average rate for the entire market; Amgen pays an annual dividend income of 2.77% but is on track to be paying 3.18% - the average rate - by 2019.
This is a practice that more biotech stocks should practice if they want to attract more investors. The idea of a growth stock slowly ramping up dividend payments from a low rate until the dividend (1) satisfies the original investors concerned about how debt could possibly add unwanted issues and (2) attracts new investors looking for either extra upside or less risk in the biotech market. The former set of investors are perhaps more discerning with their analysis on AMGN, as the dividend might be seen as a possible risk on the leeway the company has with its cash on hand, which would, for a biotech company, otherwise be going into research, trials, and development.
When you look at Amgen's spending, you're reminded of an 18-year-old with her first credit card: Drugs, trials, dividends, and buybacks. Amgen's doing everything it can possibly do with its money, and so far with good results. The buybacks action is something I don't often see discussed but certainly should be analyzed before anything else, not only because it's an important cost overall but also because it affects dividend payout.
Share buybacks can reduce the future dividend payouts for the company and therefore be a smart saving decision for the long-term. However, buybacks only are justifiable by the logic of the market if they are performed at a time when the stock is underpriced. Depending on the valuation method you use, AMGN has either succeeded or failed.
To fund buybacks, the company spent $2B alone last year in buybacks and has also taken out debt in the past, with 2011 being a notable debt-to-$5B buyback program that significantly reduced the outstanding shares. Historically, this all adheres to the "buy when underpriced logic," as the shares were always cheaper than they are now. However, you might not agree with the program for reasons of opportunity costs and for the fact that the stock has trended sideways during two years of buybacks; with buybacks always leading to price inflations, two years of a sideways trend implies that had the buybacks not occurred, AMGN would be trading lower today.
The buyback have been fierce, but this leaves the outstanding shares in good condition both for the company, who must pay dividends, and new investors, who can trust that Amgen will not dilute the shares bought now:
Maybe I've spent too much time analyzing this one stock, but I'm feeling like it really is a unicorn, the term I used previously, due to what it offers in respect to how responsible the management seems. The dividend, which sets this biotech company apart, was not initiated until the company's income was well about the payout. And the growth of said income is at a rate to more than cover future dividend increases if the current growth rate continues:
For now, investors can ride the stable dividend payments and increases if they are willing to take on some volatility. You have 44 days to choose an entry point if you want the next dividend payment. In this respect, seasonality could play a role, and so I provide the following:
Assuming by looking over the past 20 years we are also gaining a glimpse of the future, waiting it out does make sense. April has an average negative gain, while May is usually up. Indeed, seasonality here shows the dividend being enticing, as a number of months mid-year seem to underperform.
I can give you an easy entry point in May: Just buy on May 1, gobble up the dividend in June, surf the 10% average gains in June, and either avoid August or ride it out until Amgen's mini-bull season of October-Feb.
In the end, if you really want a growth stock with income generation, it's time to be honest with yourself. Biotech is an industry with many unforeseen surprises - both good and bad. If you can accept the volatility, you really can have both growth and income; only those with long-term horizons need apply.
Sources: All unlabeled figures were created by me. I used R to pull data directly from Yahoo and ADVN. Charts with blue backgrounds are from Etrade Pro. Fundamental charts from a paid subscription at simplywall.st.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within 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.