3 Reasons Warren Buffett Loves Bristol-Myers Squibb

Summary

• Warren Buffett stands a titan among investing legends, generating over 16% annual inflation-adjusted returns for 55 years. That's a 3,908 fold increase in real wealth.
• While I don't agree with all Berkshire investments, when it comes to Bristol-Myers, which BRK recently bought $2 billion of, I'm in complete agreement with the Oracle of Omaha.
• BMY represents a wonderful company, at a wonderful price. It's a classic Buffett style "fat pitch" and I've swung away to the tune of $12,000 in my retirement portfolio.
• Bristol is literally priced for zero growth forever, and even significant patent cliffs make that a very low risk scenario given its incredibly strong drug pipeline.
• Even factoring in the patent cliffs, analysts think BMY could deliver 158% total returns over the next 5 years, 5X more than the S&P 500. While pharma isn't for everyone, today BMY represents one of the most reasonable and prudent Buffett blue-chip buys you can make.
• This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »

The greatest investors in history inspire awe, and it's not hard to see why.

The Greatest Investors In History

Name	Returns	Time Horizon
Jim Simmons (Co-Founder Renaissance Technologies)	71.8% CAGR	1994 to 2014 (best investing record ever recorded)
Joel Greenblatt	40% CAGR	21 years at Gotham Capital
Peter Lynch	29.2% CAGR at Fidelity's Magellan Fund	1977 to 1990 (13 years)
Bill Miller (Legg Mason Value Trust 1990 to 2006)	22.8% CAGR and beat the S&P 500 for 15 consecutive years	16 years
Warren Buffett	20.8% CAGR at Berkshire	55 Years
Benjamin Graham	20% CAGR vs 12% S&P 500	1934 to 1956 (22 years)
Edward Thorp (invented card counting)	20+% CAGR	over 30 years
John Templeton	300% from 1939 to 1943, 15.8% CAGR from 1954 to 1992	38 years
Carl Icahn	14.6% CAGR vs 5.6% S&P 500	2001 to 2016 (15 Years)
David Swenson	13.9% CAGR at Yale's Endowment (includes bonds and alternative assets) vs 10.7% S&P 500	30 years

Click to enlarge

Photo by Paul Morigi/Getty Images Entertainment via Getty Images

Warren Buffett is considered by most to be the greatest investor of all time.

Not because his 21% annual returns are the highest ever recorded, but because he's been able to maintain that incredible compounding rate for over half a century.

$1 invested in Berkshire Hathaway 55 years ago is now worth $32,635, or $3,908 adjusted for inflation. That's 16.2% inflation-adjusted annual returns, or more than double that of the S&P 500.

Understandably when Buffett bets big on particular companies, millions take notice. Now I should say that mirroring investing legends, regardless of track record, is not necessarily the best idea.

Giant institutions like Berkshire have very different risk profiles than most people, and their goals aren't necessarily the same as yours.

That being said, in late 2020 Berkshire made some very aggressive buys of several pharma blue-chips, including a $2 billion investment into Bristol-Myers Squibb (NYSE:BMY).

• Berkshire still owns those shares, as you can verify here

(Source: Motley Fool)

While I disagree with some of Berkshire's buys over the years, when it comes to Bristol-Myers I agree with the Oracle of Omaha completely.

In fact, over the past 12 months, I've invested about $12,000 into BMY myself.

Today I wanted to share the 3 Reasons why Buffett likely is such a fan of this Super SWAN pharma giant, and why you might want to add or begin a position yourself.

Because if analysts are right, then BMY has the potential to deliver 158% total returns over the next five years, outperforming the S&P 500 by about 400%.

Reason 1: A Wonderful Wide Moat Company

DK overall quality scores factor in 138 fundamental metrics covering

• dividend safety
• balance sheet strength
• short and long-term bankruptcy risk
• accounting and corporate fraud risk
• profitability and business model
• long-term sustainability (ESG scores and trends from MSCI, Morningstar, and Reuters'/Refinitiv)
• management quality
• dividend friendly corporate culture/income dependability

Dividend Safety

Rating	Dividend Kings Safety Score (73 Safety Metric Model)	Approximate Dividend Cut Risk (Average Recession)	Approximate Dividend Cut Risk In Pandemic Level Recession
1 (very unsafe)	0% to 20%	over 4%	16+%
2 (unsafe average)	21% to 40%	over 2%	8% to 16%
3 (average)	41% to 60%	2%	4% to 8%
4 (safe)	61% to 80%	1%	2% to 4%
5 (very safe)	81% to 100%	0.5%	1% to 2%
BMY	83%	0.5%	1.8%

Click to enlarge

• up from 81% last quarter

Long-Term Dependability

Company	DK Long-Term Dependability Score	Interpretation	Points
S&P 500/Industry Average	58%	Average Dependability	2
Non-Dependable Companies	31% or below	Poor Dependability	1
Relatively Dependable Companies	32% to 69%	Below to Above-Average Dependability	2
Very Dependable Companies	71% to 80%	Very Dependable	3
Exceptionally Dependable Companies	81% or higher	Exceptional Dependability	4
BMY	77%	Very Dependable	3

Click to enlarge

• score unchanged from last quarter

Overall Quality

BMY	Final Score	Rating
Safety	83%	5
Business Model	70%	3
Dependability	77%	3
Total	80%	11 (Super SWAN)

Click to enlarge

• score unchanged from last quarter

(Source: DK Safety & Quality Tool) updated twice per day

Bristol Is the 145th Highest Quality Master List Company (Out of 491)

(Source: DK Safety & Quality Tool) updated at the end of each day, sorted by overall quality score

BMY's 80% quality score means its similar in quality to such 10/12 SWANs, 11/12 Super SWANs, and 12/12 Ultra SWANs as

• Berkshire Hathaway (BRK.B)
• Nike (NKE)
• Mastercard (MA)
• 3M (MMM) - dividend king
• BlackRock (BLK)
• Medtronic (MDT) - dividend aristocrat
• Costco (COST)
• UGI Corp (UGI) - dividend champion
• Enterprise Products Partners (EPD) (uses K-1 tax form)
• Coca-Cola (KO) - dividend king
• Union Pacific (UNP)
• Parker-Hannifin (PH) - dividend king
• General Dynamics (GD)- dividend aristocrat
• Royal Bank of Canada (RY)
• UnitedHealth Group (UNH)
• Magellan Midstream Partners (MMP)
• TC Energy (TRP)
• Facebook (FB)
• Cisco (CSCO)
• Merck (MRK) (another Buffett buy)
• Eli Lilly (LLY)
• AbbVie (ABBV) - dividend aristocrat (another Buffett buy)
• Verizon (VZ)

All told, our quality score includes 138 fundamental metrics pertaining to dividend safety, long-term dependability, and total returns. Every metric was selected based on

• decades of empirical data
• the experience of the greatest investors in history
• eight rating agencies
• and what blue-chip economists and analyst firms consider most closely correlated to a company's long-term success.

What makes Bristol such a great, wide moat company, is its very strong drug portfolio, which already includes 8 blockbuster drugs, such as Revlimid and Opdivo.

Bristol's PD-1 cancer drug Opdivo holds the potential to revolutionize cancer treatment and should drive multi-billion-dollar sales annually based on solid efficacy, combination potential with other drugs, and strong pricing power. However, competition from Merck's Keytruda will likely limit Bristol's Opdivo in some segments of the market, including lung cancer.

Bristol is aggressively repositioning itself to expand through challenging patent losses. The company has shed its diabetes business, medical imaging group, wound-care division, and nutritional business in an effort to focus on the high-margin specialty drug group.

The recent move to acquire Celgene moves Bristol significantly further into the specialty pharmaceutical segment of the market. Celgene's drugs largely target cancer, which tends to be an area with strong drug pricing power, which should help Bristol maintain its drug pricing ability in a time when both governments and private payers are pushing back on drug prices." - Morningstar (Emphasis added)

Quality is one of the proven alpha factors that consistently beat the market over time.

On Wall Street profitability is a proxy for quality and moatiness, a concept near and dear to both Buffett and Joel Greenblatt.

Bristol-Myers Consensus Margin Forecast

Year	FCF Margin	EBITDA Margin	EBIT Margin	Net Margin
2020	31.3%	64.1%	41.0%	34.7%
2021	36.6%	53.3%	43.9%	36.4%
2022	39.1%	53.3%	44.5%	20.8%
2023	42.6%	54.4%	44.6%	37.8%
2024	NA	56.7%	44.4%	37.3%
2025	NA	56.9%	43.1%	36.5%
2026	NA	63.8%	40.9%	34.5%

Click to enlarge

(Source: FactSet Research Terminal)

BMY's profitability is already among the best in big pharma.

That profitability is expected to remain stable over time, even as the patent cliffs arrive.

FCF margins are in the top 10% of American companies and EBITDA margins consistently over 50% and expected to reach 64% by 2026.

These are truly remarkable levels of profitability, and BMY's river of free cash flow is why rating agencies still rate it A+ even after taking on over $50 billion in debt to buy Celgene and MyoKardia.

Bristol-Myers Consensus Medium-Term Growth Forecast

Metric	2021 Consensus Growth	2022 Consensus Growth	2023 Consensus Growth	2024 Consensus Growth	2025 Consensus Growth	2026 Consensus Growth
Dividend	9% (Official)	5%	5%	12%	3%	NA
EPS	16%	8%	4%	1%	-3%	-7%
Operating cash flow/share	22%	16%	12%	0%	NA	NA
Free Cash Flow/share	7%	15%	NA	NA	NA	NA
EBITDA/share	51%	4%	10%	18%	NA	NA
EBIT (operating income)/share	348%	6%	3%	0%	NA	NA

Click to enlarge

(Source: FAST Graphs, FactSet Research Terminal)

The 2023 Revlimid patent cliff and more cliffs coming in 2025 and 2026 are expected to result in a modest 10% EPS decline from the 2024 peak.

However, all drug companies face patent cliffs, and if you're not comfortable with temporary periods of negative growth, then you simply stay away from this industry.

Here is what bond investors and the rating agencies care about.

Bristol-Myers Consensus Balance Sheet Forecast

Year	Debt/EBITDA (3.0 Or Less Safe)	Net Debt/EBITDA	Interest Coverage (8+ Safe)
2020	1.89	1.29	NA
2021	1.71	1.08	15.18
2022	1.45	0.62	18.25
2023	1.26	0.13	22.91
2024	1.03	-0.26	27.71
2025	0.93	-0.42	32.51

Click to enlarge

(Source: FactSet Research Terminal)

By 2025 BMY is expected to have $12.2 billion more in cash than debt, which would be one of the strongest balance sheets in its history.

$31 billion in EBITDA in 2026 (despite patent cliff) means extremely high financial flexibility for future M&A deals, which Bristol has a solid track record of.

Adept at partnerships and acquisitions, Bristol-Myers Squibb has built a strong portfolio of drugs and a robust pipeline. This strategy is seen with its recent large acquisition of Celgene, which netted the firm an excellent pipeline and a strong entrenchment in blood cancer. We believe the strong overall pipeline helps support its wide moat and steady growth potential.

Bristol has created a strong pipeline and brought in partners to share the development costs and diversify the risks of clinical and regulatory failure." - Morningstar (emphasis added)

What kind of steady growth do analysts expect from Bristol, even with several major blockbusters losing patent protection in the coming years?

(Source: FAST Graphs, FactSet Research)

(Source: Yahoo Finance, Reuters'/Refinitiv) 12/21 analysts

Collectively the 21 analysts that cover Bristol know this company better than anyone but management.

You can see that from the fact that analyst growth forecasts, which are primarily based on management guidance, are extremely accurate despite a very complex risk profile in this industry.

• analyst historical margin of error outside of the severe recessions and the recall crisis: 15% to the downside and 30% to the upside
• long-term growth consensus range: 5% to 9.7% CAGR
• long-term growth consensus: 6.1% CAGR
• the margin of error adjusted long-term growth consensus range: 4% to 13% CAGR

(Source: FAST Graphs, FactSet Research)

Analysts expect BMY to grow at approximately the same rate as it has for the last 20 years.

Now, this might not sound all that exciting yet. A blue-chip company growing at a modest 6% just as it has for the last two decades? Why would Buffett or I get excited enough to put large sums of capital at risk for this?

That's where reason #2 comes in. Buffett is a fan of buying "wonderful companies at a fair price". Today Bristol is a wonderful company at a wonderful price, or to use another famous Buffettism, a classic "fat pitch".

Wait for a fat pitch and then swing for the fences". - Warren Buffett

Reason 2: Exceptional Value In This Overvalued Market

The secret to what makes BMY a potential 158% total return investment over the next five years lies in its valuation.

(Source: FAST Graphs, FactSet Research)

As Ben Graham taught us, over the long-term the market almost always correctly weighs "the substance of a company".

Outside of bear markets and bubbles, BMY's historical fair value PE range is 18 to 20. This means there is a 91% probability that BMY's intrinsic value is between 18 and 20X earnings.

(Source: FactSet Research Terminal)

Today BMY is trading at 8.5X forward earnings. But even if you look out to 2026, the trough patent cliff year, it trades at 8.2X earnings.

According to Ben Graham, the father of modern securities analysis and valuation, a company is only justified trading at 8.5X earnings if it has zero long-term growth potential.

Buying BMY today means literally buying an anti-bubble blue-chip that's priced for ZERO growth...forever.

Whether BMY grows at 4% or 13% (its margin of error consensus growth range) doesn't matter.

When you buy a company priced for no growth (or even negative growth) even most growth can make you a fortune.

Literally, as long as BMY grows at 0% or faster over time, the dividend is safe and long-term investors who avoid becoming forced sellers for emotional or financial reasons literally can't lose money.

• anti-bubble blue-chip investing is the ultimate high-probability/low-risk strategy

Bristol Market-Determined Fair Value

Metric	Historical Fair Value Multiples (all-Year time frame)	2020	2021	2022	2023	2024	2025	2026
5-Year Average Yield	2.88%	$63	$68	$72	$75	$84	$86	NA
13-Year Median Yield	2.92%	$62	$67	$71	$74	$83	$85	NA
Earnings	18.8	$121	$141	$152	$158	$162	$157	$146
EBITDA	12.7	$84	$127	$132	$145	$171	NA	NA
EBIT (operating income)	16.4	$33	$147	$156	$160	$161	NA	NA
Average		$60	$97	$103	$108	$118	$101	$146
Current Price	$63.51
Discount To Fair Value		-5%	35%	38%	41%	46%	37%	57%
Upside To Fair Value (Not Including Dividends)		-5%	53%	62%	69%	86%	59%	130%

Click to enlarge

(Source: FAST Graphs, FactSet Research)

BMY is trading at a 35% discount to the average historical fair value, creating massive short to medium-term upside potential.

• 2021 fair value range: $67 to $147
• 2021 Harmonic Average Fair Value (smooths out outliers): $97
• fair value range: 82% very high
• excluding dividend fair values (BMY has just recently started growing the dividend at more than token rates) $127 to $147

The $97 fair value estimate is 13X consensus forward earnings, which is still very conservative.

Rating	Margin Of Safety For 11/12 Super SWAN Quality Companies	2020 Price	2021 Price	2022 Price
Potentially Reasonable Buy	0%	$60.46	$97.35	$102.63
Potentially Good Buy	10%	$54.42	$87.62	$92.36
Potentially Strong Buy	20%	$48.37	$77.88	$82.10
Potentially Very Strong Buy	30%	$42.32	$68.15	$71.84
Potentially Ultra-Value Buy	40%	$36.28	$58.41	$61.58
Currently	$63.5	-5%	35%	39%
Upside To Fair Value (Not Including Dividends)		-5%	52%	61%

Click to enlarge

BMY is not far from its ultra-value price and represents a Buffett-style fat pitch, anti-bubble buy today.

Reason 3: A Classic Buffett Style "Fat Pitch" Means Incredible Return Potential

Here is a reasonable idea of what kind of returns you can expect buying BMY today.

Bristol-Myers 2023 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If BMY grows as analysts expect through 2023, and returns to historical fair value, then analysts expect

• 158% total returns
• 41% CAGR returns
• vs -0.2% CAGR S&P 500

In the short-term BMY infinitely better total return potential than the 36% overvalued S&P 500.

(Source: F.A.S.T Graphs, FactSet Research)

Over the long term, BMY is also likely to make a far superior investment.

Bristol-Myers 2026 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

If BMY grows as analysts expect through 2026, including the patent cliffs, and returns to historical fair value, then analysts expect

• 155% total returns
• 17.7% CAGR
• vs 4.9% CAGR S&P 500
• 3.5X better than the market's consensus return potential

(Source: F.A.S.T Graphs, FactSet Research)

Over the very long-term (30+ years), here's what analysts expect.

• 3.1% yield +6.1% CAGR growth = 9.2% CAGR total returns (7.1% to 16.1% CAGR range)
• vs 7.9% CAGR S&P 500 and 9.1% CAGR dividend aristocrats

But remember that BMY's very high discount to fair value is likely to deliver double-digit total returns for decades to come. That's better than the S&P 500, aristocrats, and it could potentially even beat the tech-heavy Nasdaq for the next decade or so.

• all while you enjoy a safer dividend with 2X the market yield

Risk Profile: Why Bristol Isn't Right For Everyone

There are no risk-free companies and before you buy any stock you need to be comfortable with the fundamental risk profile.

Fundamental Risk Summary

Bristol is increasing its focus on branded drugs by selling off unrelated business lines, which elevates its exposure to patent losses.

Further, the increased branded drug focus raises the company's dependence on its pipeline. This will result in higher sales volatility than observed at its more diversified peers. Additionally, the company is exposed to risks facing the entire pharmaceutical group, including generic threats, decreasing pricing power owing to managed-care constraints, and product liability cases.

From a product-specific standpoint, we believe the company's largest pipeline risk surrounds its immunotherapy drugs, which could develop into major blockbusters or fail in the market, depending on clinical data.

Further, the risk of competitors such as Merck and Roche taking more market share in immunotherapy is rising as other companies are catching up, particularly in combination therapy. Lastly, the recent move to acquire Celgene adds financial risk due to the large amount of debt needed to finance the deal. Overall, we view the firm's uncertainty as medium." - Morningstar

The big pharma risk profile is not for everyone.

• drug trial failures
• legal liabilities from drugs that were approved but ultimately harm customers
• regulatory reform risk
• M&A execution risk
• M&A valuation risk
• inherent uncertainty about peak drug sales for approved drugs
• patent cliffs

How do we judge the regulatory and legal liability risks for an industry as complex as big pharma?

ESG Material Financial Risk Consensus

• Good For Understanding Governance, Regulatory, And Legal Liability Risk

Based on demographics, we conservatively estimate over $20tn of asset growth in ESG funds over the next two decades-equivalent to the S&P 500 today."

Similarly, an Accenture study concluded that US$30 trillion in assets will change hands, a staggering amount which, at its peak between 2031 and 2045, will witness 10% of total US wealth transferred every five years." - Research Affiliates (emphasis added)

In 2020 ESG investing became red hot and everyone and their mother launched ESG funds. But the reason that 20% of the DK quality score is based on ESG risk ratings and trends isn't that it's popular or because $20 trillion of money might pour into this strategy.

According to the world's best risk assessors, ESG metrics are a critical component of a company's overall risk profile. Here's who considers ESG important and builds it into their safety models and ratings.

• BlackRock - #1 asset manager in the world

• MSCI - #1 indexing giant

• Morningstar

• Reuters'/Refinitiv

• ISS (Institutional Shareholder Services) - #1 corporate proxy firm on earth

• S&P

• Fitch

• Moody's

• DBRS (Canadian credit rating agency)

• AMbest (insurance industry rating agency)

• Bank of America- one of the 16 most accurate economic/analyst teams in the world according to Market Watch

• Bloomberg

• FactSet Research

• State Street - one of the largest custodial banks on earth
• Wells Fargo - one of the 16 most accurate economic/analyst teams in the world according to Market Watch
• NAREIT

Bristol Consensus ESG Risk Rating

Rating Agency	Industry Percentile	Rating Agency Classification
MSCI	85.0%	A, above-average
Morningstar/Sustainalytics	94.3%	22.6/100 medium risk
Reuters'/Refinitiv (Combined ESG Rating)	50.0%	average
Consensus	76.4%	good

Click to enlarge

(Sources: MSCI, Morningstar, Reuters'/Refinitiv)

According to Morningstar, and Reuter's BMY's overall handling of its long-term financial ESG risk in the top 24% of its peers.

My goal is to factor in every single important risk, using the best risk rating agencies on earth, to monitor a company's risk profile for us.

In the case of BMY

• 3 credit rating agencies
• 3 ESG risk rating agencies
• 21 analysts
• 27 total experts monitoring BMY's risk profile and telling us whether or not news is fundamentally important

BMY Is A Member Of The DK Strong ESG Watchlist

(Source: DK Strong ESG Watchlist) - sorted by lowest PEG ratio

• green = potentially good buy or better
• blue = potential reasonable buy
• yellow = hold
• red = potential trim/sell

For anyone wanting to invest via ESG risk ratings, it's important to always remember to focus first and foremost on the fundamentals.

• ESG risk ratings are like credit ratings
• an important risk indicator that helps determine a company's overall quality

According to a 2019 study by Research Affiliates, a pioneer in alpha factoring investing, ESG currently isn't a standalone factor.

However, ESG like credit ratings can help indicate other factors, such as consistent dividend growth, and overall quality.

Dividend Kings Real Money Phoenix ESG Portfolio

(Source: Morningstar)

DK has launched a real-money ESG portfolio that screens the strong ESG watchlist for valuation and long-term consensus return potential.

• The quality of the companies is impeccable
• confirmed by profitability that's significantly higher than the S&P 500
• the valuations are reasonable (2% undervalued per Morningstar's estimates)
• the yield is 2X that of the S&P 500
• the growth consensus forecast is 14% CAGR, almost double that of the aristocrats

If these companies grow as expected, DK Phoenix ESG is going to deliver safe and growing income, as well as about 17% annual long-term returns, and outperform the vast majority of ESG funds.

Including T. Rowe's Price's (TROW) new ESG fund that's down 2% YTD.

• Morningstar rates TROW as the #1 risk-adjusted fund manager in America
• if you want to be the best you have to beat the best and that's what we're on track to do with DK Phoenix ESG

The point is that whenever you are constructing a portfolio for some specific goals, you want to remember that 91% of long-term returns are a function of fundamentals.

Every single company bought for DK's Real Money ESG portfolio is expected to deliver double-digit medium and long-term total returns.

Just as you wouldn't expect A-credit ratings to directly deliver superior returns, the same applies to high-yield investing, growth investing, ESG investing, or any strategy you employ.

Bottom Line: Bristol-Myers Is Set To Soar And Too Cheap To Ignore

I can't tell you when Bristol will return to fair value, only that there is a 90% probability it will one day trade at 18X to 20X earnings again. And there is a very high probability that that much higher multiple is going to be applied to much higher earnings resulting in exceptional returns for patient and disciplined income investors.

If BMY grows as expected, and returns to fair value within five years, Buffett and I are likely to make around 158% total returns, or 5X more than the S&P 500.

Basically, Bristol-Myers is a great example of a Buffett-style fat pitch, anti-bubble blue-chip.

• deep value investing done right
• dividend growth investing done right
• total return investing done right
• ESG investing done right

BMY is, simply put, smart investing, done right.

No, it's not for everyone, no company is. But the ability to buy a world-class quality company, at 8.5X earnings, literally priced for zero growth, is the quintessential low risk/high probability investment opportunity.

These are the kinds of "consistently not stupid" decisions that Charlie Munger credits with Buffett's sensational track record. You and I may never be able to match Buffett's 21% returns for 55 years.

But if we follow the same disciplined financial science that created those amazing returns, we stand a great chance of achieving our long-term financial goals.

Analyst’s Disclosure: I am/we are long BMY. 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.

Dividend Kings owns BMY in our portfolios.

Comments

[Rex Rode]

There are 6.4 billion reasons not to own this stock....

[nkvbradenton]

This is a classic example of market shunning value plays. Personally, I seek safety in favorable value picks like BMY that also pays decent dividend.

As the author eloquently laid out in this article, taking a multi-year position at current prices will most likely generate darn good risk adjusted returns. The beauty of these kind of investments, is that as the price momentum picks up, the investor base will start broadening out. Action begets more action. When a "fat pitch" comes one's way, cannot overthink investment rationale.

Thank you, @dividendsensi, for a well researched presentation. You always do complete justice to your writings. Your efforts are highly appreciated.

[deadhead213]

I have owned since BMY was 35. It’s a slow and steady mover that continues to gain momentum.

[Rex Rode]

How do U feel Dividend Sensei about BMY being on the hook for possibly 7-8 billion that they were hoping not to pay (IRS 1.4 B + the future CVR litigation up to 6.4 B?) The best case scenario for BMS is likely 3-4 billion. Worst case, the entire amount.

[Dividend Ambassador]

@Rex Rode I don’t know how Sensei feels but I don’t see it as a big deal. It doesn’t change the BMY story. Maybe BMY can work out a deal w IRS and pay much less than the worst case scenario. Even worst case scenario makes it nasty a short term hit. BMY still has the same robust pipe line. They still robbed the CELG shareholders blind and stole a great business at an absurdly low price. I have never witnessed a deal that was so massively accretive to the earnings of the acquiring company the second it closed. BMY are still GUSHING cash and will continue to gush cash. They can pay the debt. They can pay the shareholders. They can pay the damn IRS. They can continue to “acquire” other great companies. The sky’s the limit.

[Rex Rode]

@killiondt I agree with everything you said. So along that line, they should be able to settle with the CVR group too. I mean really, does BMS really think they should get approval of all 3 drugs before the final deadline and not have to pay a dime for them? Believe me, the CVR case is only gaining strength. If it goes all the way to court I believe BMS runs a significant risk of losing entirely. No court/jury is going to side with BMS when the Liso-cel delays can be pinpointed to BMS missteps and Covid issues (both cited in the FDA reports.) BMS should be trying to settle right away for 2-3 billion. The further this goes the uglier it will get. I'm sure Buffet is telling management the same thing.

[fun times!]

@Dividend Sensei Thank you for sharing. For the past few years, I've been writing OTM MSFT covered calls and OTM puts on MSFT, BMY, BTI, INTC in an effort (mostly failing) to trim an overgrown MSFT position and buy undervalued companies. This market is crazy! What could possibly go wrong? fun times!

[Nunthia]

would it be the main reason its pays 3% dividend?

[Dividend Sensei]

@johnny corsaro That's a nice dividend compared to the S&P 500 and aristocrats.

It can't hurt, though I think Buffett is more focused on the quality and value proposition.

[Nunthia]

@Dividend Sensei Yeah, right. Buffett is what going n 91 now and he has plenty of time to spend 100 Billion dollars

[Dividend Ambassador]

@johnny corsaro johnny, the important thing is that the payout ratio is very low. Per share earnings went from $4 (2018) before the CELG deal to now $7.50 projected this year w the legacy CELG revenue integrated. People miss that BMY managed to pull off one of the great heists in corporate history when they ripped off CELG from its shareholders for the price of beads and trinkets. After years of token increases BMY has already moved to robust increases and this can continue now for many years with the massively stepped up earnings and free cash flow.

[Robert SWAN]

No bulls worried by really huge insider sales?
Thank for the article.

[Dividend Sensei]

@Robert SWAN www.gurufocus.com/...

In the past 3 months 25,000 shares sold by insiders.

In the past 12 months 322,528 worth about $19 million.

That's almost certainly stock-based comp, which makes up the majority of the executive pay packages.

Nothing huge or alarming about it.

[Sitnikov]

@Dividend Sensei agreed...(and one could even make the case that it shows the execs are smart enough to know to diversify their pay packages -- rather than just sit on all their company stock til it becomes the majority of their portfolio as well as their paycheck)...

[Rex Rode]

@Robert SWAN I'm more worried about the potential 8 billion dollars in loss. 1.4 billion to the IRS and 6.4 billion to the CVR case....

[Amitmn]

Forgive me all ye Merry gents glorifying BMY...
Instead of this hugely elaborated essay of how wonderful this company is (just bc the oracle bought it?) I have ONE word for you: headlines.
You check the news and discover $1.4B (with a capital B) in backlog taxes trickery and a little cherry on top of that huge toad of a Sunday with an added $75m (this time it’s only an M...) for more shenanigans of underpaid insurance rebates.
Have you all lost your mind or have I???
For a terrible terrible company (see its history over any length of time it’s an absolute dog with ticks!) to have outstanding $1.5B (!!!!!) in back taxes and fines and nothing to shout about including a miserable 3% yield... sorry I’m just shocked no one is screaming the emperor is NUDE. run and hide people, run and hide from this company.
I’m long on Abbvie all the way btw as it’s a totally different ballgame but completely out of chevron, Merck and some other BH choices I just do not understand for the life of me.

[German-Investor]

@Amitmn You have noticed how much the company earns per year? Even if the allegations are true (at the moment it is a NYT-article) the tax backlog is around 1 month in earnings. Not to forget that BMY was down 1.87% yesterday, so around $2.7 bn. So even if they have to pay back that money it doesn't change the business case in any way.

[Amitmn]

@German-Investor my issue is that even with those huge yoy profits and terrific numbers the market still treats it as an unwanted child... how much better can they do and get no response from the market. Ever. Not over 2, 5, 10 or 20 years. Compared to Abbvie it’s glued to the bottom of the chart. BMY and MRK alike.
That’s exactly the kind of company that the market responds only to catastrophes not triumphs. That $1.5B potential loss will throw them down 30% off its current price. Just look at vistra/ NRG with similar issues after the Texas calamity. Now try and imagine that happening to BMY with a mere 3% div you’d need 10 years to catch up... makes me extremely edgy ...

[German-Investor]

@Amitmn 30% off because of a potential $1.5B loss at a company valued $150bn? So the company will lose $45bn because they could have to pay taxes valued $1.5bn? Doesn't make any sense.
I don't know what the market will do but a company growing EPS at around 6% per year + 3% dividend yield will return around 9% per year without a change in the p/e ratio. If you think it is realistic that a safe and growing blue chip should trade at an p/e ratio of 8-9 and lower in the next years (because of the growth) then that is your opinion. I think it should at least trade at a P/e ratio of 13 but I also didn't mind if it returns 9% per year with no revaluation.

ABBV was also a huge dog until the end of 2019. So that is not a good example to show me why BMY is not worth an investment.

[ArtfulDodger]

Fellow Investors:

I own several pharma stocks. They have a lot of potential under normal conditions, but then there's a government that is doing all it can to pass Bernie and Warren's dream policies, at least to some degree.

And anything they can place what they've made a pejorative in front of, in this case, "Big," they detest, such as "Big Pharma." (You know the others: "Big Oil"; "Big Banks"; etc.) And by so knocking these companies for years have convinced millions of young folks to hate them, too, with hardly more than a whim for their case.

That's a concern! Also, as far as BMY goes, and although I don't follow WB, I would like to know at what price BRK paid of it.

Long ABBV, AMGN, BIIB, & PFE.

AD

[Dividend Sensei]

@ArtfulDodger

Regulatory risk is part of the ESG risk rating, and we have 6 rating agencies covering the full risk profile of the company for us.

Single-payer is a very low risk, according to all analysts, rating agencies, and morning.

"Under 5% probability over the next 10 years" according to Morningstar.

"The intelligent investor is a REALIST who buys from pessimists and sells to optimists." - Ben Graham

In this senate, there are 8 conservative Democrats who demanded to be able to vote against the $15 minimum wage.

Something 90% of Democrats and 60% to 70% of Americans support.

This was AFTER the Senate Parliamentarian ruled that $15 minimum wage can't be passed through reconciliation.

The blue-dog Democrats insisted that a vote be brought up so they can go on the record opposing something the progressives love.

Does this sound like a Senate that will ever pass single payer? Something Biden is on the record opposing?

If those 8 Democrats are primaries out, they are likely to be replaced with Republicans.

And a 50 seat majority becomes a 42 seat minority.

Manchin just said no to filibuster reform.

Even if that passes, Dems can't afford to lose a single vote.

So when 27 rating agencies and analysts say not to be overly concerned about what Bernie or Warren propose, the facts back them up.

What you personally think of single-payer is irrelevant.

The only thing that matters is whether or not it can pass. And a sub 5% risk is not anything to lose sleep over.

BMY's 18 to 20X fair value PE is over the last 20 years.

Obamacare? Still 18 to 20.

Pre-Obama care? 18 to 20.

Slow growth? 18 to 20.

Fast growth? 18 to 20.

Like I said, unless BMY's growth outlook collapses significantly, which is not likely according to the 27 experts who factor in regulator/political risk into their ratings and growth estimates, BMY will eventually return to 18 to 20 PE.

Most likely within 5 years.

Thus the fat pitch anti-bubble opportunity for glorious profits and very safe and steadily growing dividends.

[tkang87]

@Dividend Sensei a lot more reassuring and good analysis. Wondering if the current POTUS will find some loopholes in legislation and try to force things through by executive order or claiming national security etc... haha, but thanks for sharing your analysis and perspective.

[Dividend Sensei]

@tkang87

On energy, there are hard limits to what EOs can do.

Legal action can tie things up for years, and for the major stuff, Congress has to pass it.

And right now Congress is likely to be a small majority for whoever is in charge.

That's likely to remain the case for the next decade since the census is now complete and gerrymandering can't be overturned once districts are redrawn.

[Willow Street Investments]

A Drug-Pricing Overhaul Is Coming. What It Means for Stocks.
By Josh Nathan-Kazis
April 6, 2021 11:13 am ET
Order Reprints
Print Article

Greater clarity about the outlook could eventually help drug stocks.
Dreamstime
Legislation aimed at curbing drug prices appears to be finally on its way, after years of promises from both Democrats and Republicans and worries from healthcare investors. Now, the prospect is setting off a debate over what it will mean for drug stocks.

In notes out early Tuesday, analysts at Cowen and SVB Leerink laid out the challenge. Both analysts agreed that drug-price legislation, along with other factors, could have a negative near-term effect on drug stock prices.

The longer-term picture, however, may be rosier. In his note, Cowen analyst Steve Scala wrote that once legislation passes, drug company stocks might actually rise.

“History suggests that passage or even defeat of pricing legislation could lift pharma PE multiples as clarity is gained and investor fears ease,” Scala wrote.

He noted that, before the passage of the Affordable Care Act in 2010, large-capitalization pharmaceutical firms were trading far below the average price/earnings ratio of the S&P 500. By 2013, their average P/E ratio was on par with the S&P 500 average.

The S&P 500 Pharmaceuticals index now trades at 13.6 times the earnings expected over the next 12 months, well short of the S&P 500 index, at 22.6 times, according to FactSet.

After a year in which Covid-19 all but pushed aside conversations about overhauling drug pricing, the issue is back. Sen. Bernie Sanders, at the helm of the Senate Budget Committee is pushing a number of proposals, while other efforts move through the House of Representatives. In his note on Tuesday, SVB Leerink analyst Dr. Geoffrey Porges wrote that there is substantial heat on the secretary of Health and Human Services, Xavier Becerra, to make progress.

“The new secretary of HHS faces immediate pressure, and expectations, to tackle drug pricing, and the influence of anti-pharma Democratic members in the house and senate will become more apparent through this year and heading to the mid-term elections in 2022,” Porges wrote. “Both Democrats and Republicans are expected by voters to show progress on drug pricing reform, and this alignment of interests suggests to us that significant changes are likely.”

While Scala sees P/E ratios rising after passage of drug-pricing legislation, he says that earnings per share for the large-cap pharma firms could fall, depending on which proposal passes. In his Tuesday note, he calculated the risks to the earnings of a number of large-cap firms, based on various potential pieces of legislation. For the bipartisan bill proposed by the Senate Finance Committee, which would, among other things, make changes to Medicare Part D, Scala says that the average risk to large-cap pharma EPS is 4%.

Medicare Part D helps cover the cost of prescription drugs.

“EPS risk from drug pricing reform ranges from 3% for plans requiring $10B in annual drug industry funding to 12% for plans such as [House Resolution 3], where annual price tag could be $40B,” Scala wrote. “Senate Finance bill, perhaps most likely, would place 4% of EPS at risk with $13B yearly fee.”

Porges, in his note, presented the drug-pricing risk as one of a number of challenges in Washington, D.C., that could depress drug stocks. Also on the list are changes at the Food and Drug Administration and the Federal Trade Commission.

“We believe that together these risks will put a cap on any recovery in large biopharmaceutical stock multiples, at least until they are substantively resolved,” Porges wrote.

[Dividend Sensei]

@Willow Street Investments Thanks for this.

Note the possibility for negative short-term price impact.

But not to the fundamentals.

If fundamentals keep going up the price going down is, by definition, a glorious long-term buying opportunity.

"Today I buy what others won't, so tomorrow I'll earn returns others can't." - Jerry Rice paraphrase

I chased BMY down to $45, it bottomed at $42.

Nice profits on that, but I've kept buying on the way up because fundamentals have been growing almost as fast as the price.

8.3X forward earnings and 8.0X if you use the 2026 patent cliff trough.

There has never been a patient long-term investor in history that has paid 8X earnings for a quality blue-chip that's been growing steadily and is expected to keep growing steadily, that's lived to regret that decision.

It's always possible this will be the first time.

But BMY at 8X earnings is one of the fattest pitch, anti-bubble blue-chips on Wall Street today.

Not every anti-bubble blue-chip investment pays off.

Historically 80% do, 20% don't.

But I watch the fundamentals every quarter and BMY keeps proving my facts and reasoning right.

Unless something drastic changes, BMY likely going to be one of the best investments of the next five years.

[Willow Street Investments]

@Dividend Sensei I have been in BMY since about 2001 at about $22 a share and have been reinvesting dividends ever since.

Yeah it is not AAPL (otherwise I would several million dollars by now) but my original 1500 shares are now over 3000 shares.

[Dividend Sensei]

@Willow Street Investments Not bad. 9.4% CAGR total returns.

That's what analysts roughly expect from BMY over the coming decades.

And it's very likely to beat the S&P 500 by about 1.5% annually.

[weemo451]

Buffet is no longer the sole stock-picker at Berkshire Hathaway. He has a crew of underlings he has increasingly delegated responsibility to. They do make "non-Buffet" picks so don't assume too much.

[Dividend Sensei]

@weemo451 True, for several years, almost 10 in fact, Todd and Ted have been managing money for BRK.

I believe each is now up to $20 billion in AUM for BRK.

Buffett is still the primary shot caller for the big deals.

Multi-billions and it's likely Buffett.

$2 billion each into BMY, ABBV, and MRK is likely Buffett though Todd or Ted might have pulled the trigger.

[Stephenbakerlaw]

DS, there is a company that Buffett loves a lot more than BMY and he knows it well.

[Dividend Sensei]

@Stephenbakerlaw There are many companies BRK owns more of.

But few that they've been buying such large amounts of recently and that I agree are exceptional opportunities.

Some of BRK's recent buys, such as Kroger, are not ones I would have emulated.

The same with Verizon and Chevron.

But BMY, MRK, and ABBV I certainly see the logic in.

And I've been buying them as well.

[Stephenbakerlaw]

@Dividend Sensei I think you missed my point, LOL. Buffett has repurchased $20 billion +/- of his own stock in the past year. If you want to know what company Buffett really loves, that is a pretty good tell.

[Dividend Sensei]

@Stephenbakerlaw

I own BRK, which I bought back in April 2020.

BRK is overvalued right now.

Buffett disagrees but I have to remain disciplined.

And my valuation model is based on earnings and cash flows, specifically the historical fair value multiples.

If BRK grows at the 12% analysts expect over time, then eventually BRK will outperform the broader market.

I own BRK because it's a growth stock. That one day I believe will pay dividends.

Because the money pile will grow too big not to.

[BM Cashflow Detective]

Bristol-Myers' main competitive advantage is primarily its ability to create patents and pharmaceuticals with high sales potential through research and development, and to acquire them through acquisitions. This is proven success that can also be assumed for the future.

A very good 5-year forward PEG ratio 0.86 includes significant free additional leverage compared to the Large Cap Pharmaceuticals industry's still good TTM PEG ratio of 1.90.

The current Blended P / FCF 10.54 shows an undervaluation compared to the 10 year fair value of Normal P / FCF Ratio 27.68. After that, a really very high current margin of safety of 61.92%.

In other words. Hardly any downside potential and a lot of upside potential.

The strong sales of drugs like Opdivo, Revlimid and Eliquis are encouraging and nowhere near adequately priced in. These should continue to increase the return on sales. Bristol-Myers' efforts to develop its pipeline are also encouraging and are also confirmed by analysts.

There is a lot of pessimism in the Bristol-Myers share price. Wonderful. All in all, it's an investment that is very well tailored to my taste.

I'm long $BMY

Enlightenment does not mean standing in the light
but learn to see in the dark.

[Kmasse]

@BM Cashflow Detective Great comments as always. Why do you reckon BMY is so undervalued?

[BM Cashflow Detective]

@Kmasse
For this there is apparently a collection of several bad news.

The Celgene Acquisition Risks.

Bristol-Myers has faced generic competition on several of its key products.

The company is also facing tough competition in the immuno-oncology field.

Pipeline setbacks in the development of new drug candidates.

Global efforts by local governments to contain healthcare costs. Which in turn leads to price pressure on drugs.

High Debt Ratio.

Compared to its peer median, this is noticeable as follows.

Bristol-Myers has relatively low profit margins and medium wealth efficiency. Earnings per share and operating margin fell four times in a row. Narrowing of operating margins thus contributed to decline in earnings.

Over the last five years, Bristol-Myers's return on assets has declined from about median to less than the median among its peers.

And finally, the good news.

Bad news doesn't last forever either.

[Dividend Sensei]

@BM Cashflow Detective

The version of that Carl Yung quote I've seen is

"One does not become enlightened by imagining figures of light, but by making the darkness conscious." - CY

[Mick Research]

"Today I wanted to share the 3 Reasons why Buffett likely is such a fan of this Super SWAN pharma giant,"

Berkshire's market cap ~$600bn. He has invested less than $2bn, that's ~0.3%. Not a big fan of BMY, if you ask me.

[jonathanssa]

warren doesn't look at BRK's market cap, he looks at the float. BRK could be valued by other people at $1B and be soundly hated, but if he wants a position to be 1% of his portfolio, then he takes 1% of his own pool of investible cash, same as you do. not 1% of what the market thinks of him.

[Dividend Sensei]

@Mick Research In Q4, with the market at record highs, and 36% overvalued, BRK bought $6 billion of BMY, ABBV, and MRK, 3 brand new companies for its portfolio.

That's a substantial amount.

[larrylivingston]

@Mick Research Mr. Buffett had said in the past that Pharma has high risks, so the way to invest is to spread your bets, and buy when P/E is low. This looks like he is putting his money where his mouth is :)

It's interesting that he bought PFE as well, but then quickly sold off. Glad to see he kept ABBV and BMY. MRK is a head scratcher for me.

[Andrew Feazelle]

I like BMY as it's been trading relatively flat for a year, allowing me time to add here and there. Plus I like the 3% dividend.

[Dividend Sensei]

@andrewfez Very wise mind set.

Blue-chip bargains that remain bargains for years are the key to a rich retirement.

BTI fell to the lowest PE in 20 years...2 years ago.

The fundamentals have improved and so the valuation has remained pretty flat at the lowest PE in 20 years.

Investors have made excellent 16% CAGR total returns, and yet bargain hunters have been able to buy for years.

That's how I've invested about $57K into BTI so far.

And I continue to buy small amounts on a steady schedule.

If a blue-chip stays undervalued for long enough, I'll invest a small house worth into it.

So that when the price finally catches up to fundamentals, which I monitor closely over time, then my absolute profits will be enormous.

For following common sense, Wall Street rewards patient long-term investors with eye-popping riches.

[Mister Doom]

I own BMY and VZ for their dividends. I don’t expect much more.
I don’t think either one will go up much. That’s ok

[Dividend Sensei]

@Mister Doom All companies eventually return to fair value.

The reason value investing keeps working is that few people realize that "long-term" = 10-20 years, not 1 to 2.

Even if you tell people this, and show them the data that proves it, it's still too long for most people.

It's one thing to say "buy and hold for 10 years."

It's another if the company you buy at a 20% discount, is 30% undervalued in a year and 40% undervalued two years later.

And some even become 50% undervalued 3 years after you bought them.

With the fundamentals firmly moving higher the entire time.

Remember all those rolling return tables I use in my articles?

That highlight the best rolling returns from bear market lows?

Fundamentals moving higher while prices fall for years is how those amazing returns happen.

As high as 26% annually...for 15 years.

What hyper-growth legend achieved 3116% total returns over 15 years?

Pfizer.

As Joel Greenblatt said, "Buying great companies at bargain prices is the key to making lots of money."

BMY has been in a bear market for almost 4 years.

It's not a momentum stock.

Not yet anyway.

One day it will be.

And then it won't just return to fair value of about 19X earnings.

It will overshoot just like happens with all blue-chips.

I doubt I will ever sell my BMY shares, as long as the thesis holds and they don't become 67% or more overvalued.

Which is unlikely. But modestly overvalued, by 10% to 30%? That's a near certainty if your time horizon is long enough.

[Mister Doom]

@Dividend Sensei I find if you hold a stock too long something will
Always go wrong, no buy and hope for me.

[Dividend Sensei]

@Mister Doom

I'm not a buy-and-hold purist like B&H 2012.

He never sells anything no matter what. Still owns GE and LUMN, the former CTL.

Both used to be aristocrats.

If the thesis breaks then I'll sell.

But holding forever is OK because the winners can go up a lot more than the losers can fall.

You can't lose more than 100% but you can make millions of percent over decades.

[5ofDiamonds]

I dismiss it as herd mentality article @Dividend Sensei Everyone says $BMY is a great buy, and more articles pop up. SA has seen this in past with $SKT. My 1c.

[German-Investor]

@5ofDiamonds just because everybody on SA writes about the stock doesn't change its fundamentals. You should dismiss a stock because of that and not because of the number of SA-articles. SKT had and has not really great fundamentals and is in an industry that is in a secular decline. Cannot see that in BMY.

[Dividend Sensei]

@5ofDiamonds The difference between BMY and SKT is what I call clean and dirty value.

Clean value is like BMY, where the earnings, cash flow and dividends are rising every year, while the price falls over some overblown risk.

Dirty value is when the fundamentals collapse and then the question becomes "is it a permanent collapse or will the company return to growth."

SKT now appears likely to survive. That wasn't a sure thing, so I wouldn't have called SKT a Buffett-style fat pitch.

The growth consensus was negative for many months.

My brand of anti-bubble blue-chip investing is finding a blue-chip with positive growth consensus from all sources.

That's priced for negative growth.

And then buying it for as long as the fundamentals remain positive and the market is pricing in negative growth.

As long as the company grows at 0+% I'm guaranteed to make a lot of money.

While collecting generous, safe, and steadily growing dividends.

Getting paid by the company to make a lot of money is a ridiculously good deal.

Most people don't realize how good a deal it is. This is why I never have to fear running out of great bargains to buy.

I could keep writing on SA for 50 years. Amass a following in the millions.

Each article might be sent out to 1 million real-time followers.

And still the bargains would be plentiful.

Disciplined financial science, by definition requires more discipline and patience than most people.

Buffett has been preaching the "secret" of success for over 50 years.

Yet most investors still do very poorly.

"The stock market is designed to transfer money from the active to the patient." - Warren Buffett

[viralca]

PFE please buy BMY

[User 40509285]

@viralca Never happen. PFE could never handle that much debt. You picked the wrong dog in that fight. Long BMY and ABBV.

[Dividend Sensei]

@viralca That would be a massive deal.

One that makes sense, but would require a ton of stock and debt.

Remember BMY took on about $52 billion in total debt to buy CELG and MyoKardia.

$177 billion is BMY's enterprise value.

Add on an appropriate premium, and this could be a $250 billion deal.

PFE is big, but it would need to be a merger of equals to pull off a deal of that size.

[al_chemyst]

A Buffett recommendation seems to be the kids of death, these past 5 or 10yrs.
He has to get special considerations to make money, like 10% int. guaranteed warrants, and the like. He doesn't play the same game we do.

[Ogillies]

@al_chemyst kiss of death? I've heard a younger person say "smoking mirrors" once.

[robertlgriffin]

@Ogillies "Kids of death" to me means our young progressives in Congress who are trying to kill off capitalism.

[fun times!]

@al_chemyst Sounds like something my grandparents may have referred to when my sisters and I would get together with my cousins and start planning some shenanigans ... those "kids of death." fun times!

or maybe when he invests in old tobacco, or new cannabis stocks, or new at home gambling stocks ... what could possibly go wrong? "kids of death!" fun times!

[Justss]

Just because it's historical P/E is between 18-20x does not mean it will revert there ("91% probability" in your words). That's totally backward looking. Maybe things have changed and it will never achieve it's past P/E range, but ur assuming it was there before, so it must go back there. How's that working for you now that the stock is sub-10x, cuz u could have made that argument at any point in the past few years. Obviously, things did change. I am a recent BMY buyer ~61 and believe the potential EPS acceleration will drive the P/E higher, hopefully into the low-mid teens. But your forecast is way too aggressive and not based on anything. What is your forecast for S&P 500 earnings if every stock in the index reverts to it's past P/E range ??

[Andrew Feazelle]

@Justss His stocks only have to revert to the historical average 6 out of 10 times for him to win. Earnings growth (correlated with capital appreciation) + dividend + multiple expansion is their return model, so even if it only hits 15 or whatever the industry average is, everyone is still making money...

[Dividend Sensei]

@Justss That 18 to 20 PE is both over the last 20 years, and the last 10.

ACA passes? Still 19X earnings.

Flat growth? Fast growth? Still 19X earnings.

Unless BMY's fundamentals are totally different than the last 20 years, meaning growth is negative or we get single-payer healthcare, there is a 91% probability that BMY will eventually return to 18 to 20X earnings.

Not my opinion, but the collective opinion of hundreds of millions of investors over 20 years.

And their opinion is as close to objective reality as we'll ever find on Wall Street.

And the consensus opinion of 27 analysts and rating agencies is that "this time isn't different".

In case they are wrong, that's where risk cap recommendations come in.

[Dividend Sensei]

@andrewfez Correct.

For the best analysts 60% to 80% of investments will work out as expected.

However, if you focus on quality at a fair price or bargain price, then even the ones that don't work out as expected will make you money.

I own 109 companies.

6 of them are down since I bought them, on cap gains, ignoring dividends.

-3.5% is my biggest loser.

Financial science is statistical in nature. But it is a science.