It’s relatively rare for high quality, best in breed type dividend growth stocks to go on sale. As a DG investor who pays a lot of attention to value, these are the situations that I find myself sitting around, waiting to take advantage of. So, what if I told you that one of (if not the best) dividend growth stocks of all time has recently been discounted by the market? You’d be excited right? You might even say that sort of opportunity is too good to be true. Well, it’s not. Amgen (AMGN) has sold off roughly 10% during the last month and presents dividend growth investors with a potentially very attractive long-term opportunity.
Some might be surprised to see me calling Amgen one of the best dividend growth stocks of all time. Oftentimes, I think, when DGIs think about healthcare/bio-tech/big pharma names, companies like Johnson and Johnson (JNJ), Abbot Laboratories (ABT), Medtronic (MDT), or even a behemoth like Pfizer (PFE) comes to mind. Names like these might have much longer dividend growth stories than Amgen, but they aren’t nearly as impressive (specifically when looking at the “growth” aspect of dividend growth). Furthermore, when you factor in the capital gains that Amgen has provided alongside its fantastic dividend growth, AMGN's shares become really tough to beat.
But, you don’t have to take my word for it. Let’s take a look at some long-term data.
Over the last 20 years, AMGN's shares have produced a total annualized rate of return of 10.8%. This might not seem overly impressive, but it’s important to acknowledge that this data begins with a purchase made on 12/31/1998, meaning that AMGN's shares have produced a double-digit annualized ROR throughout a period of time that includes two major recessions.
During the same period of time, the S&P 500’s annualized ROR is just 5.9%. It’s clear that AMGN has significantly outperformed the broader market, yet to really put this into perspective, it’s best to look at it in dollar terms. A $10,000 investment in Amgen back in 1998 would be worth more $79,500 today (including dividends, but without dividends being re-invested). Likewise, a $10,000 investment into the S&P 500 on Dec. 31st, 1998 would be worth ~$31,500 today (once again, with dividends included, but not re-invested).
As you can see, an investment in AMGN has more than doubled the S&P 500’s performance over the long term. Using shorter-term comparisons, AMGN has posted alpha as well (though not quite as high). Looking at a 10-year comparison, AMGN’s annualized ROR is 13.5% while the SPY’s is 9.9%. And using a 5-year comparison, AMGN’s annualized ROR is 12% while the SPY’s is 11.2%.
The narrowing gap between AMGN and SPY’s performance here seems to have to do with two major issues. One being the law of large numbers. AMGN is a much more mature company today than it was in 1998. Its current market cap is ~$116B. It’s difficult for a company of that size to generate growth that truly moves the needle. However, it is worth noting that AMGN has continued its upside trend in the short term and continues to ride the tide higher in this bull market run. But, where this company really seems to outperform isn’t during strong bull runs, but instead, during bear markets.
AMGN performed great during the dot-com boom/bust, though that’s not a great comparison to today’s company, because at that time, it was much more of a speculative growth name. However, during the 08/09 great recession, AMGN had already morphed into a big time biotech player and we see that it actually posted positive performance from 12/31/2007 to 12/31/2009.
At the trough of the great recession, AMGN’s P/E multiple fell to ~10x. This isn’t all that far from the ~12x multiple that shares sport today, further signaling that today’s share price probably comes with limited downside (barring major bottom line disruption). Analysts have turned fairly bearish on AMGN’s future growth prospects, calling for low to mid single-digit EPS growth for 2019, 2020, and 2021. This type of performance would be a far cry from the bottom-line growth that AMGN has produced over the last decade.
For a while now, investors could essentially count on AMGN to produce double-digit EPS growth. It’s this bottom-line growth that has fueled the stock’s tremendous dividend growth. I’m going to talk about AMGN’s dividend in a moment, but before I do that, I want to talk about the company’s slowing growth and why I’m still happy to be a shareholder in the face of these expectations.
For several years now, AMGN’s top-line growth has stalled in the low single-digit range. This has led to lower EPS growth as well and analyst aren’t expecting this trend to change (though it was worth noting that the recent Q4 sales were up 7% and GAAP income was up 6%).
This company definitely has headwinds. Namely, in the form of Enbrel, its largest drug, which is posting negative growth at the moment (but it’s not just Embrel, many of AMGN’s biggest drugs see patent cliff issues on the horizon and/or competition from biosimiliars that have entered into the market). Enbrel sales slumped 5% during Q4 and were negative 8% on the full year. That negative trend is likely to continue. Thankfully, AMGN has a well diversified portfolio of drugs (including 7 blockbusters).
Four of these seven produced negative sales in 2018, though, and the company needs its newer entrants/pipeline to make up those these declining legacy drugs. Drugs like Repatha (a $550M drug growing at 70%), Prolia (a $2.3B drug growing at 16%), Xgena (a $1.75B drug growing at 13%), and Kyprolis (a $960M drug growing at 16%) certainly help. Blincyto is one of AMGN’s fastest growing drugs, with sales accelerating to 37% growth last quarter, yet it only produced $230M in sales in 2018. AMGN spent nearly $4B on R&D in 2018 and is believed to have several strong contenders in its current pipeline which would also help to replace lost legacy sales moving forward.
AMGN has also taken major steps to cut costs out of its business, making it more efficient. Cost-cutting measures are great in the short term and have helped AMGN increase profits at a greater rate than it has increased sales, yet these measures do not create sustainable growth over the long term. Manufacturing efficiencies do allow the company to dedicate larger amounts of capital to things like R&D and M&A, so there is that indirect growth aspect, however.
Speaking of cash flows, this is where AMGN really continues to shine. The company’s focus on cost cutting is producing great results in the cash flow department, with operating cash flows coming in at $11.3B and free cash flows coming in at $10.5B. Granted, both of these numbers had declining growth rates in 2018 compared to years past. But, when you take a step back and look at the cash flow chart with a bit more of a long-term perspective, you see that AMGN has nearly doubled its operational cash flows and its FCF over the past 5 years.
It’s this profitability that has allowed the company to return much cash to shareholders (in the form of a rising dividend and a shareholder buyback) without raising the debt levels. AMGN’s long-term debt has remained fairly steady over the last 5 years, hovering consistently in the $30B area. However, over this same course of time, the dividend has more than doubled from $1.88/share to $5.11/share and the company has reduced its overall float by an impressive 16%.
Furthermore, the company had $29.3B of cash on the balance sheet at the end of the most recent quarter, giving it more dry powder to buy back shares, pay a raising dividend, or potentially join the likes of Bristol-Myers (BMY) and make a splash in the M&A market, bolstering its pipeline and future growth prospects. I think focusing on this cash and the potential that it has to generate growth is important right now when the company’s top-line is stalling. I can only imagine that management realizes that while its cost-cutting measures have been successful, the fat has already been trimmed at this point and now might be a good time to make an acquisition.
But, that’s all fairly speculative at this point. Instead of spending too much time worrying about what AMGN’s management is going to do to address its various issues, I’d rather simply put my trust in their ability to continue to pilot this ship. I know that hope isn’t much of a strategy in the markets. I suppose you could also say that faith/trust isn’t either. Faith and hope are fairly similar, aren’t they? But, I’m a strong believer in the idea that success doesn’t happen on accident. A company doesn’t grow to the size and strength of AMGN without stellar leadership, a strong culture, and talent. When you combine the intellectual/human capital that AMGN has amassed over the years with its cash flow/cash on its balance sheet, I’m able to sleep well at night holding these shares.
The company’s dividend plays a big role in my bullish stance. Like I said in the opening, few companies have posted dividend growth that can rival AMGN’s. AMGN initiated its current dividend at the end of 2011. Since then, the quarterly dividend has increased from $0.28/share to $1.45/share. In other words, in the last 7 and a half years, AMGN’s quarterly dividend has increased by more than 5-fold. The company recently provided investors with a 9.8% dividend increase. What’s not to like about that?
This fabulous growth means that someone who bought the shares back in 2011 (receiving a ~2% yield at the time) would have a yield on cost of more than 20% today. As you can see on the F.A.S.T. Graph below, since it initiated its dividend, AMGN has provided investors with strong, double-digit annual growth, which has resulted in a dividend growth CAGR of 37.8%.
Source: F.A.S.T. Graphs
Now, I don’t think we’ll see a ~40% dividend growth CAGR moving forward. I don’t even think the number will be half of that much. AMGN’s EPS growth is slowing, and while I think management can improve the current outlook, I don’t expect to see the strong double-digit bottom-line results that would make ~20% annual dividend growth sustainable.
AMGN’s payout ratio remains relatively low, meaning that dividend growth could outpace earnings growth for a little while still without putting the balance sheet in trouble, but I don’t think it’s in management’s best interest to push that envelope. Most of the mega-cap biotech/pharma names that pay dividends have payout ratios in the 40-50% range. I think that makes sense for AMGN because these companies have to dedicate a lot of their cash flows towards R&D to keep the pipeline robust.
I suspect to see dividend growth in the 7-12% range moving forward from AMGN. And you know what? I’m totally fine with that as a shareholder. Give me a 3%+ yield that is growing in the high single digits/low double digits and I’m always going to be a happy camper.
Since the company’s annual dividend growth streak is fairly short, AMGN doesn’t pop up on any dividend aristocrat lists. This is partly why I think many DG investors overlook the name. However, I think AMGN’s business remains strong and I imagine that it’s only a matter of time before AMGN is considered to be a dividend aristocrat/champion. The days of 20% annual dividend growth may be in the past, but I’d still much rather get in closer to the ground floor of this compounding process than wait until the proof is in the pudding (and therefore, missing out on the early growth).
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Disclosure: I am/we are long AMGN, JNJ, BMY, PFE, MDT. 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.