Amgen Defies The Trend

Amgen (NASDAQ:AMGN) has been in my portfolio for a while. I most recently added in November of 2017. I have sold calls on my position many times and today is another example of this strategy.

• AMGN has history of EPS greater than dividends paid out
• D/E ratio is a bit high
• Dividend on par with 10-year Treasury
• Covered call options enhance income

First, Let's Look At AMGN's Fundamentals

On first blush, AMGN would not pass my criteria test because EPS of $2.57 is much less than dividends paid out of $5.28. However, this is an aberration. AMGN took a big write-off in the fourth quarter of 2017. Without that write-off, AMGN has consistently produced earnings in excess of dividends paid out, and this is one of the "moats" that I use to quell my nerves.

The table below is courtesy of Nasdaq.com

AMGN yields 2.8%, which is pretty close to the 10-year U.S. Treasury. I need more income than a 10-year Treasury or I would buy the more safe Treasury.

AMGN carries a debt-to-equity ratio (D/E) of 1.158. My rule for D/E ratio is less than one or within industry standard. A good comparison is Gilead (GILD), which carries a D/E ratio of 1.395, making AMGN's D/E respectable. MSN Money calculates industry D/E average of .90, making AMGN's D/E ratio just a bit high. If AMGN has a weakness, it is this slightly elevated D/E ratio.

Two catalysts make me want to hold onto AMGN.

• Annual dividend raises: over 20% since 2015
• Covered call options: add 1.13% to yield

Today AMGN is one a few stocks in my personal portfolios that is up. Moreover, a very nice call is available. See the details in the table presented below:

I am not adding to AMGN at this time, I am, however, working my portfolio for income on a stock that I feel has a good "moat" of safety. The call expiration is only 49 days away. While a call does limit upside potential, it also can limit my ability to unload AMGN should something go terribly wrong. This is why I chose an expiration date less than two months. If you go out further, you could capture the dividend in May, however, AMGN did not have any May calls available, and I did not want to go out as far as June.

M* MoneyMadam

Comments

[Clayton Atchison]

Sort of new to investing-- I have a quick question. In the graph above regarding the call option. How did you determine that you would have a 16%+ return if the shares were called away? Could you write up a quick explanation? Thanks!

Nevermind. I figured it out. haha. Thanks. Great read. Are there other stocks you recommend selling call options?

[MoneyMadam]

Dear Clayton, thanks for reading. I routinely write about my covered call options on my blog. Here is the link. M*

http://bit.ly/16QOXuN

[Just Scott]

MM,
> I need more income than a 10-year Treasury or I would buy the more safe Treasury.<
Safer, yes. But:
10k in a 10 year treasury 10 years ago would now be worth - 10k, plus some interest. 10k in AMGN would now be worth - 40k, plus some dividends.
Scott

[Billkhoe]

II bought shortly after Amgen began trading, enjoyed numerous splits and bought more shares over the years. My basis is virtually nothing and I o nly sold twice to buy 2 new cars paid for my my gains.
Without a doubt best stock I've ever owned.

[donzoamania]

Greatest biotech in the world. Too many investors second guessing this great management team. Many SA authors with negative articles all proven wrong every time. Just one this forever. Collect the ever growing dividends. Fair vale is $225 and this low PE is a joke.

[Flufferbot aka joseph sixpack III]

No biotech is safe to one (own?) forever.

[gstucke]

Amgen pays their dividend this Thursday Mar 8 sounds like an attractive option but I only own enough to buy 1 contract.

[Sparkerdude]

Money Madam,
Thanks for this note. Out of curiosity, how does the impending auction play into your calculations? Did you tender any shares?
Michael

[JustGiveMeTheDividends]

Doesn't sound like the author is aware of it? The last time AMGN did this a couple of years ago, they only got tenders for 2/3 of the max shares, so all of the tendered shares were purchased at the max price. My best guess is that most people aren't aware of it or will ignore it?
So I tendered all of my shares at $190 -- this gives me a shot at getting the $200, but didn't want to lose the shares at $175 in case the market takes a dump and lots of people do tender their shares.

[gstucke]

If you tender your shares at $190 how will you get $200? I don't think the objective at Amgen is to get a certain number of shares off the market. It is to get as many shares up to the max off the market at the lowest price.

[JustGiveMeTheDividends]

If fewer shares are tendered than AMGN has offered to buy, by definition they will pay the $200 for however many shares were tendered. The price will get adjusted downwards only once the number of tendered shares exceeds the number of shares bid, so the ultimate price depends on number of shares tendered + the minimum price specified for each share.
If the max shares that they have offered to buy is 50,000,000, the lots of tendered shares will be sorted by ask price, and the actual price paid will be the ask price of the 50,000,000-th share. Then the number of shares that you lose will be the number of shares you tendered pro-rated by 50,000,000 divided by the actual number of shares tendered.