There are not many companies in the biotech industry that pay dividends, and that's understandable considering the capital-intensive nature of the industry. I instituted a search for biotech companies that pay dividends and I found only five U.S. traded stocks. Impressively, all five of them have notable yields. NeoStem Inc. (NASDAQ: NBS), a small-cap company, is one of them.
NeoStem has paid dividends twice; first in 2011, and more recently in November 2013. That's nowhere near impressive, but that the company has paid dividends at all suggests that it's committed to rewarding its shareholders. But the question is, can it become a dividend champion someday?
Dividend investors already know that free cash flow is important in determining the sustainability of dividend payments. Basically, companies are expected to use a portion of their free cash flow to pay dividends. Anything other than that suggests that dividends are being paid to the detriment of the company's balance sheet. This seem to be the case for NeoStem.
Neostem has managed only one positive free cash flow in the last five years, and that was during the first (non-fiscal) quarter of 2012. If historical trends are to be considered, NeoStem does not have any hope generating positive free cash flow anytime soon. This shows that NeoStem is not ripe enough to pay dividends. Even during the quarters it paid dividends, free cash flow was negative.
It is worthy to argue that the company generates positive gross profits, which are also considered in dividend payments. But then, you should note that it struggles to generate healthy gross profits to encourage dividend payment. This becomes clearer when you compare NeoStem to PDL BioPharma Inc. (NASDAQ: PDLI), a bigger competitor.
PDL is one of the five companies I mentioned earlier, paying an annualized dividend of 60 cents with a 6.4 percent yield. It's been paying dividend every quarter since the beginning of 2011, though it paid intermittently in previous quarters. The continuity in its payment of dividends is made possible by the fact that it has a healthy enough free cash flow to use for dividend payments. In fiscal 2012, the company paid a total of $83.9 million in dividends. That represents only about 33 percent of the company's free cash flow during the fiscal year, having over a hundred million dollars left that can still be used to pay dividends. Such figures assures investors that the company can continue to pay, and even grow, dividends. NeoStem can't boast of such power obviously.
Although I said that NeoStem is not ripe enough to pay dividends, its desire to pay at all should be appreciated. And to be fair to Neostem, it has built a business that can generate huge free cash flow in future that can be used to pay dividends on a consistent basis. It is focused on cell therapy, a niche of biotechnology that's not limited to just a set of diseases. Its drug candidates are potential transformative treatments for patients in several indications. As such, biotech investors should follow this company, as it could become an income stock someday.