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September lived up to its reputation as the worst month for stocks. The S&P fell almost 5% and the Nasdaq even more.
However, it's important to remember that so far, as far as the entire market is concerned, this is merely a pullback, totally healthy, normal, and to be expected.
(Source: Jills Mislinksi)
Pullbacks and corrections are necessary for the market to remain the best performing asset class in history.
Volatility isn't risk. It's the source of future returns." - Joshua Brown, CEO Ritholtz Wealth Management
In fact, analysts and economists have been predicting a 10% to 20% correction this year, and of course, it's always a market of stocks, not a stock market.
Two Weeks Ago The Majority Of S&P Companies Were In A Correction
Even two weeks ago most stocks were already in a correction and most small caps were in a bear market.
Basically, price fluctuations have only one significant meaning for the true investor.
They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal." - Benjamin Graham
Prudent investors, who own a diversified and appropriate risk management portfolio for their needs, have nothing to fear from even the most intense short-term volatility.
In fact, as Ben Graham pointed out, the smart investor doesn't fear volatility but celebrated it.
Be greedy when others are fearful." - Warren Buffett
Over the next three weeks, the market could see increased volatility due to one major risk factor in particular.
(Source: Final Countdown, Janett Yellen)
Here is a 21-page report on the debt ceiling crisis and why it might result in a 10% to 20% correction in the next two to four weeks.
Rest assured that I'm tracking the 2021 debt default closely, with daily updates in the Dividend Kings Daily Blue-Chip Deal Videos.
My goal isn't to scare anyone, but to provide essential context and fact-based analysis so that you cannot just survive what could be a short but severe correction, but actually profit from it.
In 2011, the debt ceiling crisis, which saw S&P downgrade America's credit rating to AA+, also resulted in a nearly 20% correction.
Moody's forecasts a severe recession should the US default, but fortunately, almost all economists, analysts, and the bond market are expecting this crisis to pass without default and things to be back to normal by early December.
My goal isn't to try to tell you what stocks will go up in any given downturn, because almost all of them fall.
Rather I want to provide you with reasonable and prudent long-term investment opportunities so you harness volatility and make it work for you.
That brings me to Viatris (NASDAQ:VTRS), which is one of the best anti-bubble Buffett-style "fat pitches" on Wall Street today.
In a market correction, such as we saw in 2011, or December 2018 (also a nearly 20% decline) investors buying Viatris could lock in literally Buffett-like returns from this anti-bubble bargain hiding in plain sight.
So let's take a look at why I've invested $6,500 into Viatris so far, and why you might want to take a stake in what could be one of the best-performing high-yielding stocks of the next few years. In fact, analysts think VTRS could potentially deliver 250% total returns in the next five years, 7x that of the S&P 500.
In other words, here's why Viatris is one of the best high-yield Buffett-style "fat pitches" on Wall Street, no matter what happens next with the debt ceiling drama.
Reason One: Anti-Bubble Valuation Creates A Sky-High Margin Of Safety
According to the Graham/Dodd fair value formula even a company growing at zero forever, can still deliver market-beating returns if you buy it at 8.5x earnings or cash flows.
That's because an 8.5 multiple represents an 11.8% earnings yield and if such a company pays out all of its earnings as dividends, investors will earn 11.8% over time, about 9.8% adjusted for long-term expected inflation.
That's actually above the market's historical 6.7% CAGR real return since 1821. In other words, if you buy a company with stable but not growing earnings, you can achieve market-beating returns purely due to mouth-watering valuation.
Or to put it another way, if you buy anti-bubble companies it's impossible to lose money as long as they grow at 0+% if you avoid becoming a forced seller for emotional or financial reasons.
Viatris was created by the merger of Mylan with Pfizer's (PFE) Upjohn generic and off-patent drug business.
The historical data we have is for Mylan, and not the far higher quality company that's now being run by former Pfizer executives.
(Source: FAST Graphs, FactSet Research)
Mylan investors paid 6 to 14 historical PE depending on the growth rate. 10x earnings is approximate fair value for Mylan growing at 3.8% CAGR, similar to what analysts expect from VTRS in the future.
Remember that 8.5x earnings is Graham's anti-bubble valuation.
| Metric | Historical Fair Value Multiples (11-Years) | 2020 | 2021 | 2022 | 2023 | 2024 | 12-Month Forward Fair Value |
| 13-Year Median P/S | 1.71 | $17.10 | $24.97 | $24.97 | $24.97 | $24.97 | |
| Earnings | 9.43 | $37.24 | $34.27 | $35.24 | $37.01 | $38.29 | |
| Operating Cash Flow | 10.99 | $22.51 | $29.25 | $39.91 | $45.02 | NA | |
| EBITDA | 6.51 | $38.69 | $34.30 | $34.90 | $36.42 | NA | |
| Average | $25.71 | $30.17 | $32.75 | $34.26 | $30.22 | $32.10 | |
| Current Price | $13.55 | ||||||
Discount To Fair Value | 47.29% | 55.09% | 58.62% | 60.45% | 55.17% | 57.79% | |
Upside To Fair Value (NOT Including Dividends) | 89.71% | 122.67% | 141.69% | 152.86% | 123.05% | 136.93% | |
| 2021 EPS | 2022 EPS | 2021 Weighted EPS | 2022 Weighted EPS | 12-Month Forward EPS | 12-Month Average Fair Value Forward PE | Current Forward PE | |
| $3.64 | $3.74 | $0.91 | $2.81 | $3.72 | 8.6 | 3.6 |
Even ignoring the fact that Viatris is now a much higher quality and better run company than Mylan was, we can see that using historical Mylan fair value multiples during periods of modest growth, Mylan was fairly valued at about 8.6x earnings.
Today Viatris is trading at 3.6x forward earnings, potentially 58% undervalued, pricing in -9.8% CAGR long-term growth forever according to the Graham/Dodd fair value formula.
That's an absurdly low bar to clear, and management, analysts, credit rating agencies, and the bond market all expect VTRS to easily clear it.
Reason Two: A Recession-Resistant Business Model Allowing For Steadily Growing Dividends
The new entity will largely be led by Pfizer executives and will be registered in Delaware.
The new entity is anticipated to leverage the stand-alone Mylan infrastructure consisting of roughly 55 manufacturing and research and development facilities and that were largely acquired, including Matrix Laboratories and the generics business of Germany-based Merck KGaA.
The combined portfolio will consist of the mature Upjohn drugs with notably better economics and Mylan's portfolio of more than 7,500 generic, specialty, and over-the-counter active ingredients and medicines, including EpiPen (treatment for anaphylaxis acquired through the Merck KGaA transaction). Unlike its generic peers, the company has made the most progress on the biosimilar front." - Morningstar
Viatris is now a global leader in generic drugs, which are expected to eventually make up about 90% of all global drug volumes.
(Source: investor presentation)
Viatris already has numerous off-patent brands that generate stable cash flow in all economic conditions.
(Source: investor presentation)
And management has a plan for delivering consistent though modest growth in the future.
(Source: investor presentation)
We are on track to achieve $500 million in synergies this year and on track for at least $1 billion by the end of 2023... Year-to-date we have reduced our debt by approximately $1.2 billion...
With the momentum we have built and what we can see to-date, our three-year cash outlook makes us highly confident that we will meet our stated objectives of potential dividend growth, $6.5 billion of debt pay down by 2023, and increased financial flexibility for the company going forward." - CEO, Q2 conference call
That plan is going well, according to analysts and credit rating agencies.
(Source: investor presentation)
Viatris has 31 generic launches in the pipeline which have a $224 billion target market.
(Source: investor presentation)
VTRS will only gain a small fraction of that market, but remember that we're talking about a company trading at 3.6x earnings and a 58% discount to Mylan's historical fair value.
(Source: investor presentation)
Topline sales growth is expected to be flat for the foreseeable future.
VTRS Medium-Term Growth Consensus
| Metric | 2020 Growth | 2021 Growth Consensus | 2022 Growth Consensus | 2023 Growth Consensus | 2024 Growth Consensus |
| Sales | 4% | 49% | -1% | 0% | 0% |
| Dividend | NA | NA | 52% | 70% | NA |
| EPS | -11% | -8% | 3% | 5% | 3% |
| Operating Cash Flow | -41% | 30% | 36% | 13% | NA |
| Free Cash Flow | -47% | 18% | 50% | NA | NA |
| EBITDA | 6% | -11% | 2% | 4% | NA |
| EBIT (operating income) | 31% | 120% | 2% | 5% | NA |
(Source: FAST Graphs, FactSet Research)
But after 2021's patent cliff year, earnings are expected to grow through cost-cutting.
VTRS Dividend Consensus Forecast
| Year | Dividend Consensus | EPS/Share Consensus | Payout Ratio | Retained (Post-Dividend) Earnings | Buyback Potential | Debt Repayment Potential |
| 2021 | $0.33 | $3.65 | 9.0% | $4,014 | 24.90% | 18.0% |
| 2022 | $0.50 | $3.77 | 13.3% | $3,953 | 24.53% | 20.0% |
| 2023 | $0.85 | $3.94 | 21.6% | $3,736 | 23.18% | 23.5% |
| Total 2021 Through 2023 | $1.68 | $11.36 | 14.8% | $11,703.12 | 72.60% | 52.50% |
| Annualized Rate | 60.49% | 3.90% | 54.47% | -3.53% | -3.53% | 14.12% |
(Source: FactSet Research Terminal)
60% is the payout ratio safety guideline for Pharma and Viatris is expected to maintain a very safe payout ratio that allows it to rapidly deleverage.
No buybacks are currently forecast through 2025 but management has said that after de-leveraging is complete by 2023, it might start buying back stock.
And at current valuations, Viatris' post-dividend retained earnings could buy back up to 24% pf shared every year.
And the very well-covered dividend is expected to grow rapidly in the coming years.
- 3.2% yield today
- 6.5% 2023 consensus yield on cost if you buy it today
In other words, you're getting a relatively generous and very well-covered dividend that's expected to grow at impressive rates as we wait for VTRS management to deliver very modest growth expectations.
Now let's consider the balance sheet, which is one of VTRS' main risk factors right now.
| Credit Rating | Safe Net Debt/EBITDA For Most Companies (Including Pharma) | 30-Year Default/Bankruptcy Risk |
| BBB | 3.0 or less | 7.50% |
| A- | 2.5 or less | 2.50% |
| A | 2.0 or less | 0.66% |
| A+ | 1.8 or less | 0.60% |
| AA | 1.5 or less | 0.51% |
| AAA | 1.1 or less | 0.07% |
Here are the leverage safety guidelines for pharma according to S&P, Fitch, and Moody's.
VTRS Credit Rating
| Rating Agency | Credit Rating | 30-Year Default/Bankruptcy Risk | Chance of Losing 100% Of Your Investment 1 In |
| S&P | BBB- stable outlook | 11.00% | 9.1 |
| Fitch | BBB stable outlook | 7.50% | 13.3 |
| Moody's | Baa3 (BBB- equivalent) stable outlook | 11.00% | 9.1 |
| Consensus | BBB- stable outlook | 9.83% | 10.2 |
(Sources: S&P, Fitch, Moody's)
VTRS was spun-off with a lot of debt and is focused on bringing that down to safe levels.
VTRS Leverage Consensus Forecast
| Year | Debt/EBITDA | Net Debt/EBITDA (3.0 Or Less Safe According To Rating Agencies) | Interest Coverage (8+ Safe) |
| 2020 | 6.14 | 6.84 | 6.53 |
| 2021 | 3.51 | 3.61 | 9.38 |
| 2022 | 3.02 | 3.01 | 11.03 |
| 2023 Management Target | 2.31 | 2.40 | 13.19 |
| 2024 | 2.07 | NA | 14.97 |
| 2025 | 1.86 | NA | 15.42 |
| 2026 | NA | NA | 18.98 |
| Annualized Change | -21.21% | -29.51% | 19.46% |
(Source: FactSet Research Terminal)
Analysts expect management will hit its de-leveraging targets and bring debt/EBITDA down to less than 2 by 2025.
VTRS Balance Sheet Consensus Forecast
| Year | Total Debt (Millions) | Cash | Net Debt (Millions) | Interest Cost (Millions) | EBITDA (Millions) | Operating Income (Millions) |
| 2020 | $22,429 | $844 | $24,994 | $517 | $3,654 | $3,376 |
| 2021 | $22,291 | $2,141 | $22,929 | $639 | $6,355 | $5,992 |
| 2022 | $19,791 | $3,904 | $19,702 | $562 | $6,547 | $6,197 |
| 2023 | $15,929 | $7,801 | $16,488 | $486 | $6,882 | $6,408 |
| 2024 | $14,429 | $11,049 | NA | $436 | $6,984 | $6,529 |
| 2025 | $12,929 | $15,293 | NA | $419 | $6,938 | $6,462 |
| 2026 | NA | NA | NA | $357 | $7,866 | $6,775.00 |
| Annualized Growth | -10.43% | 78.50% | -12.95% | -5.99% | 13.63% | 12.31% |
(Source: FactSet Research Terminal) net debt includes accounts payable and working capital
VTRS' cash position is expected to grow at almost 80% CAGR over the next few years as debt rapidly falls and cash flow steadily increases.
(Source: FactSet Research Terminal)
2.7% average borrowing costs today and analysts expect them to remain at about 3% over time. The bond market, the "smart money" on Wall Street is confident enough in VTRS' plans to lend to it for almost 30 years at just 3.4%.
VTRS Margin Consensus Forecast
| Year | FCF Margin | EBITDA Margin | EBIT (Operating) Margin | Net Margin |
| 2020 | 12.0% | 30.6% | 28.3% | 19.9% |
| 2021 | 14.6% | 35.7% | 33.7% | 24.7% |
| 2022 | 19.1% | 37.2% | 35.2% | 26.0% |
| 2023 | 19.1% | 39.0% | 36.3% | 27.1% |
| 2024 | 21.3% | 39.5% | 36.9% | 28.0% |
| 2025 | 26.7% | 40.0% | 37.2% | 28.3% |
| 2026 | 28.4% | 44.8% | 38.6% | 29.9% |
| Annualized Growth | 15.41% | 6.58% | 5.34% | 7.08% |
(Source: FactSet Research Terminal)
Viatris' margins are expected to steadily improve in the coming years, thanks to steady cost-cutting and some of the industry's best economies of scale.
VTRS Profit Growth Forecast
| Year | Sales | FCF | EBITDA | EBIT (Operating Income) | Net Income |
| 2020 | $11,946 | $1,433 | $3,654 | $3,376 | $2,372 |
| 2021 | $17,779 | $2,602 | $6,355 | $5,992 | $4,386 |
| 2022 | $17,599 | $3,363 | $6,547 | $6,197 | $4,573 |
| 2023 | $17,658 | $3,375 | $6,882 | $6,408 | $4,784 |
| 2024 | $17,677 | $3,759 | $6,984 | $6,529 | $4,941 |
| 2025 | $17,360 | $4,627 | $6,938 | $6,462 | $4,919 |
| 2026 | $17,541 | $4,973 | $7,866 | $6,775 | $5,250 |
| Annualized Growth 2021-2026 | -0.27% | 13.83% | 4.36% | 2.49% | 3.66% |
(Source: FactSet Research Terminal)
Modest but steady growth is expected in the bottom line and of course, future buybacks could be used to drive even stronger growth in FCF/share and EPS.
What kind of growth do analysts expect from VTRS in the future keeping in mind that the stock is currently priced for -9.8% CAGR growth?
Long-Term Growth Consensus Forecast
(Source: FactSet Research Terminal)
The median growth consensus went from 1.7% to 3.6% post-earnings, in which VTRS raised its guidance and reported very strong results.
The growth consensus range is 0.4% to 3.6% CAGR but remember that 3.6 PE is pricing in almost -10% growth forever.
Smoothing for outliers 25% margin of error to the downside and 15% to the upside. This is for Mylan, which was a far worse managed company.
This means a 0.3% to 5% CAGR margin-of-error growth consensus range.
(Source: FAST Graphs, FactSet Research)
Mylan was a company that was indeed capable of mid-single to even double-digit growth, and buybacks alone could help VTRS beat very low current expectations and achieve short-term Buffett-like returns from this anti-bubble/Buffett-style "fat pitch" in the coming years.
Reason Three: Buffett-Like Short To Medium Term Return Potential
Analyst Median 12-Month Price Target | Morningstar Fair Value Estimate |
| $18.85 | $25.00 (6.7 PE) |
Discount To Price Target (Not A Fair Value Estimate) | Discount To Fair Value |
| 28.12% | 45.80% |
Upside To Price Target (Not Including Dividend) | Upside To Fair Value (Not Including Dividend) |
| 39.11% | 84.50% |
12-Month Median Total Return Price (Including Dividend) | Fair Value + 12-Month Dividend |
| $19.29 | $25.44 |
Discount To Total Price Target (Not A Fair Value Estimate) | Discount To Fair Value + 12-Month Dividend |
| 29.76% | 46.74% |
Upside To Price Target ( Including Dividend) | Upside To Fair Value + Dividend |
| 42.36% | 87.75% |
Analysts are extremely bullish on VTRS and predicting a 42% total return in just the next year.
Morningstar is slightly less bullish on VTRS' growth profile and its discounted cash flow model estimates its fair value at 6.7X earnings, which would still be a 46% margin of safety.
Now I never actually base recommendations or real money investment decisions based on 12-month price targets.
| Time Frame (Years) | Total Returns Explained By Fundamentals/Valuations |
| 1 Day | 0.02% |
| 1 month | 0.4% |
| 3 month | 1.25% |
| 6 months | 2.5% |
| 1 | 5% |
| 2 | 16% |
| 3 | 25% |
| 4 | 33% |
| 5 | 41% |
| 6 | 49% |
| 7 | 57% |
| 8 | 66% |
| 9 | 74% |
| 10 | 82% |
| 11+ | 90% to 91% |
(Sources: DK S&P 500 Valuation And Total Return Potential Tool, JPMorgan, Bank of America, Princeton, RIA)
- over 12 months luck is 20x as powerful as fundamentals
- over 11+ years fundamentals are 11x as powerful as luck
Over the long term, valuation tends to explain 80% of stock returns according to Bank of America.
And this brings us to the incredible short-term return potential of VTRS thanks to its outrageously attractive valuation.
For context, here's the return potential of the 24% overvalued S&P 500.
S&P 500 2023 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
S&P 500 2026 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
Aristocrats are expected to deliver about 6.6% CAGR returns over the next five years.
What about VTRS? If VTRS grows as expected and returns to Mylan's historical fair value range, then investors could see 14% to 37% CAGR total returns in the next five years.
VTRS 2023 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
VTRS 2026 Consensus Total Return Potential
(Source: FAST Graphs, FactSet Research)
A return to mid-range historical Mylan fair value combined with very modest sub 4% growth through 2026, could deliver 250% total returns, or Buffett-like 27% CAGR.
VTRS Investment Decision Score
| Ticker | VTRS | DK Quality Rating | 7 | 54% | Investment Grade | A |
| Sector | Healthcare | Safety | 3 | 54% | Investment Score | 94% |
| Industry | Pharmaceuticals | Dependability | 2 | 54% | 5-Year Dividend Return | 73.30% |
| Sub-Industry | Pharmaceuticals | Business Model | 2 | Today's 5+ Year Risk-Adjusted Expected Return | 17.75% | |
| Below Average, Phoenix, Speculative | ||||||
| Goal | Scores | Scale | Interpretation | |||
| Valuation | 4 | Strong Buy | VTRS' 58.73% discount to fair value earns it a 4-of-4 score for valuation timeliness | |||
| Preservation of Capital | 5 | Average | VTRS' credit rating of BBB- implies a 11% chance of bankruptcy risk, and earns it a 5-of-7 score for Preservation of Capital | |||
| Return of Capital | 10 | Exceptional | VTRS' 73.30% vs. the S&P's 9.31% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score | |||
| Return on Capital | 10 | Exceptional | VTRS' 17.75% vs. the S&P's 4.12% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score | |||
| Total Score | 29 | Max score of 31 | S&P's Score | |||
| Investment Score | 94% | Excellent | 73/100 = C(Market Average) | |||
| Investment Letter Grade | A | |||||
(Source: DK Automated Investment Decision Tool)
For anyone comfortable with VTRS's risk profile and more speculative nature, it represents a potentially excellent investment opportunity with more than 4x the market's risk-adjusted expected returns.
Over the long-term analysts expect:
- 3.3% yield (vs 2.3% aristocrats) + 3.6% growth (vs 8.9% aristocrats) = 6.9% CAGR total return potential
- 3.6% to 8.3% CAGR range
Note that VTRS's slow growth rate means that analysts don't expect it to deliver strong returns for 30+ years when valuation changes tend to cancel out.
| Investment Strategy | Yield | LT Consensus Growth | LT Consensus Total Return Potential |
| Safe Midstream | 6.1% | 6.2% | 12.3% |
| Viatris | 3.3% | 3.6% | 6.9% |
| Safe Midstream + Growth | 3.3% | 8.5% | 11.8% |
| REITs | 3.0% | 6.9% | 9.9% |
| High-Yield | 2.8% | 11.2% | 14.0% |
| Dividend Aristocrats | 2.4% | 8.9% | 11.3% |
| Value | 2.1% | 11.9% | 14.0% |
| 60/40 Retirement Portfolio | 1.8% | 5.1% | 6.9% |
| REITs + Growth | 1.8% | 8.9% | 10.6% |
| High-Yield + Growth | 1.7% | 11.0% | 12.7% |
| Dividend Aristocrats + Growth | 1.4% | 12.3% | 13.7% |
| S&P 500 | 1.5% | 8.5% | 10.0% |
| Nasdaq (Growth) | 0.5% | 10.8% | 11.3% |
(Source: Morningstar, FactSet Research)
But look what happens if we combine VTRS with a fast-growing high-yield aristocrat like V.F. Corp (VFC).
| Company | Yield | Growth Consensus | Long-Term Consensus Total Return Potential | Weighting | Weighted Yield | Weighted Growth | Weighted Total Return Potential |
| V.F. Corp | 2.9% | 13.0% | 15.9% | 50.00% | 1.5% | 6.5% | 8.0% |
| Viatris | 3.3% | 3.6% | 6.9% | 50.00% | 1.7% | 1.8% | 3.5% |
| Total | 7.9% | 25.1% | 33.0% | 100.0% | 3.1% | 8.3% | 11.4% |
Then we get a 3.1% yielding stock, with 8.3% consensus growth and aristocrat beating 11.4% CAGR consensus long-term return potential.
| Company | Yield | Growth Consensus | Long-Term Consensus Total Return Potential | Weighting | Weighted Yield | Weighted Growth | Weighted Total Return Potential |
| Philip Morris International (PM) | 5.0% | 12.1% | 17.1% | 50.00% | 2.5% | 6.1% | 8.6% |
| V.F. Corp | 2.9% | 13.0% | 15.9% | 0.00% | 0.0% | 0.0% | 0.0% |
| Viatris | 3.3% | 3.6% | 6.9% | 50.00% | 1.7% | 1.8% | 3.5% |
| Total | 7.9% | 25.1% | 33.0% | 100.0% | 4.2% | 7.9% | 12.0% |
Combining VTRS with Dividend King Philip Morris generates 4.2% yield and potentially 12% CAGR long-term returns, better than analysts expect the Nasdaq to deliver (and with over 8x the safe yield).
This is the Zen Phoenix strategy in action.
- Zen Phoenix: always buy growth at a reasonable price alongside yield and always buy high-safe yield alongside growth at a reasonable price
- balance in all things that matter
Risk Profile: Why Viatris Isn't Right For Everyone
There are no risk-free companies and no company is right for everyone. You have to be comfortable with the fundamental risk profile.
VTRS Risk Profile Summary
We maintain a very high uncertainty rating on Viatris due to the company's relatively high financial leverage. Furthermore, the company has high geographic and product concentration in addition to a lack of visibility into the pipeline.
Viatris operates in an evolving healthcare market with significant regulatory and competitive pressures. It will need to continue to aggressively replenish its pipeline of complex generic and specialty drugs to pay down debt. However, this is challenging, because there is a lack of visibility into the company's pipeline. The continued focus on complex generics are critical to remain a leading generic drug manufacturer. The new economics of the combined entity should allow Viatris to pay down its large debt balance." - Morningstar
VTRS' Risk Profile Includes
- de-leveraging risk
- litigation risk (from products harming consumers)
- drug development risk
- political/regulatory risk (pertaining to drug pricing and reimbursement)
- M&A execution risk
- market share risk (over 1,000 rivals in this space)
- margin compression risk - specifically for generics
- supply chain disruption risk
- talent retention risk (and industry leader in labor relations)
- currency risk
Showing the lack of pricing power and a lack of a moat, the generics market has contracted roughly 50% over the last several years.
This was caused by three key market events that show the industry players lack a moat: (1) the formation of three generic sourcing groups yielding significant negotiating power, as they account for approximately 85% of generic volume,
(2) entry of low-cost manufacturers (mostly based in India), and (3) the approval of 2,000 abbreviated new drug application filings by the Food and Drug Administration and allowance of multiple generic filers to compete for generic conversion of a rapidly shrinking number of potential blockbuster branded drugs." - Morningstar
In addition to the company's normal risk profile, there's also its relatively lower quality to consider (VTRS is a turnaround stock after all).
The Dividend King's overall quality scores are based on a 207 point model that includes
dividend safety
balance sheet strength
short and long-term bankruptcy risk
accounting and corporate fraud risk
profitability and business model
growth consensus estimates
cost of capital
long-term risk-management scores from MSCI, Morningstar, FactSet, S&P, Reuters'/Refinitiv and Just Capital
management quality
dividend friendly corporate culture/income dependability
long-term total returns (a Ben Graham sign of quality)
analyst consensus long-term return potential
It actually includes over 1,000 metrics if you count everything factored in by 12 rating agencies we use to assess fundamental risk.
credit and risk management ratings make up 38% of the DK safety and quality model
dividend/balance sheet/risk ratings make up 77% of the DK safety and quality model
How do we know that our safety and quality model works well?
During the two worst recessions in 75 years, our safety model predicted 87% of blue-chip dividend cuts during the ultimate baptism by fire for any dividend safety model.
VTRS quality is currently below-average thanks to high debt and Mylan's terrible historical return history.
Mylan Total Returns Since 1985
(Source: Portfolio Visualizer)
But even with Mylan's sub-par returns, buying at these kinds of anti-bubble valuations has delivered Buffett-like returns over the next 10 to 15 years.
VTRS Dividend Safety
| Rating | Dividend Kings Safety Score (120 Point Safety Model) | Approximate Dividend Cut Risk (Average Recession) | Approximate Dividend Cut Risk In Pandemic Level Recession |
| 1 - unsafe | 0% to 20% | over 4% | 16+% |
| 2- below 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% |
| VTRS | 54% | 2.0% | 5.4% |
Long-Term Dependability
| Company | DK Long-Term Dependability Score | Interpretation | Points |
| Non-Dependable Companies | 18% or below | Poor Dependability | 1 |
| Low Dependability Companies | 19% to 57% | Below-Average Dependability | 2 |
| S&P 500/Industry Average | 58% (58% to 67% range) | Average Dependability | 3 |
| Above-Average | 68% to 77% | Very Dependable | 4 |
| Very Good | 78% or higher | Exceptional Dependability | 5 |
| VTRS | 54% | Below-Average Dependability | 2 |
Overall Quality
| VTRS | Final Score | Rating |
| Safety | 54% | 3/5 average |
| Business Model | 60% | 2/3 average |
| Dependability | 54% | 2/5 below-average |
| Total | 54% | 7/13 Below- Average Speculative |
For anyone comfortable with VTRS's lower quality, today's anti-bubble valuation could provide a sensational medium-term investment opportunity.
The DK max risk cap recommendation is currently 1% or less on Viatris though that is expected to rise to 7.5% eventually as the company improves its safety and quality.
VTRS Consensus Quality Forecast (2026)
| VTRS | Final Score | Rating |
| Safety | 67% | 4/5 safe |
| Business Model | 60% | 2/3 above-average |
| Dependability | 54% | 3/5 average |
| Total | 61% | 9/13 Above-Average (Non-Speculative) |
VTRS Consensus Quality Forecast (2041) - 20 Year Dividend Growth Streak
| VTRS | Final Score | Rating |
| Safety | 82% | 5/5 very safe |
| Business Model | 60% | 2/3 above-average |
| Dependability | 60% | 3/5 average |
| Total | 72% | 10/13 Blue-Chip |
VTRS is expected to eventually become a blue-chip quality company, but that's expected to take many years.
How do we quantify, monitor, and track such a complex risk profile to determine whether or not an investment thesis is intact?
By doing what big institutions do.
Material Financial ESG Risk Analysis: How Large Institutions Measure Total Risk
- 4 Things You Need To Know To Profit From ESG Investing
- What Investors Need To Know About Company Long-Term Risk Management (Video)
Here is a special report that outlines the most important aspects of understanding long-term ESG financial risks for your investments.
- ESG is NOT "political or personal ethics based investing"
- it's total long-term risk management analysis
ESG is just normal risk by another name." Simon MacMahon, head of ESG and corporate governance research, Sustainalytics" - Morningstar
S&P, Fitch, Moody's, DBRS (Canadian rating agency), AM Best (insurance rating agency), R&I Credit Rating (Japanese rating agency), and the Japan Credit Rating Agency have been using ESG models in their credit ratings for decades.
- credit and risk management ratings make up 38% of the DK safety and quality model
- dividend/balance sheet/risk ratings make up 77% of the DK safety and quality model
VTRS Long-Term Risk Management Consensus
| Rating Agency | Industry Percentile | Rating Agency Classification |
| MSCI | 43.0% | BB, Below-Average |
| Morningstar/Sustainalytics | 79.8% | 30.1/100 High Risk |
| Reuters'/Refinitiv | 96.5% | Excellent |
| S&P | 27.0% | Poor |
| Consensus | 61.6% | Above-Average |
| FactSet Qualitative Assessment | Below-Average | Stable Trend |
(Sources: MSCI, Morningstar, Reuters', S&P FactSet Research)
(Source: Morningstar) - 20 metric model
- 80th industry percentile
- 40th percentile among almost 14,000 globally rated companies
(Source: Reuters'/Refinitiv) - over 500 metric model
Reuters considers VTRS's risk management to be in the top 3.5% of its industry.
How We Monitor VTRS's Risk Profile
- 16 analysts
- 3 credit rating agencies
- 7 total risk rating agencies
- 23 experts who collectively know this business better than anyone other than management
When the facts change, I change my mind. What do you do sir?" - John Maynard Keynes
There are no sacred cows at iREIT or Dividend Kings. Wherever the fundamentals lead we always follow. That's the essence of disciplined financial science, the math retiring rich and staying rich in retirement.
Bottom Line: During This Potential Correction Viatris Is One Of The Best High-Yield Buffett-Style "Fat Pitches" You Can Buy
The prospects of a potential 10% to 20% correction in the next three weeks might seem scary to most.
But remember what Joshua Brown said, "volatility isn't risk, it's the source of future returns."
The last time we had a debt ceiling correction the market rallied 25% in the next year. And Mylan, despite being nowhere near as undervalued as Viatris is today soared 30%.
Viatris today is a far higher quality and better-managed company than Mylan, and over time analysts, management, rating agencies, and bond investors expect its de-leveraging and strong generic drug pipeline to make it a blue-chip quality company.
And at today's 3.6x earnings, and 58% discount to Mylan's historical fair value, 3.3% yielding Viatris represents the ultimate high-yield Buffett-style "fat pitch" anti-bubble stock.
That doesn't mean it can't or won't fall significantly in a sharp December 2018 style correction.
But it does mean that for discipline long-term income investors the potential to earn nearly 200% total returns in the next 2 years and 250% over the next five years, makes Viatris worth considering for your diversified and prudently risk-managed portfolio.
If you're tired of losing sleep at night worrying about the stock market, it's time to stop gambling and start investing.
Luck is what happens when preparation meets opportunity." - Seneca
By embracing disciplined financial science, you can take charge of your financial future and make your own luck on Wall Street, thus achieving your rich retirement dreams.
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