The current investing climate is precarious to say the least. The U.S. economy is officially in recession, and while the S&P 500 Index has rallied significantly off of its 52-week low, the uncertainty of the coronavirus is a lingering threat.
In times of economic uncertainty, investors should seek the relative safety of undervalued large-cap stocks with durable competitive advantages, and high dividend yields. Bristol-Myers Squibb (BMY) stock has declined 10% year-to-date, but the company remains a leader in the Big Pharma industry.
Bristol-Myers Squibb stock appears undervalued today, and also has a solid dividend yield of 3.1%. Overall, the stock looks attractive for investors interested in a mix of value, growth, and dividends.
Business Overview and Recent Earnings
Bristol-Myers Squibb is a diversified pharmaceutical manufacturer, with a particularly strong position in cardiovascular and anti-cancer therapeutics. The company generates annual revenues of more than $42 billion. The stock has a market capitalization of approximately $132 billion.
The company is reporting strong growth in recent quarters, due primarily to the $74 billion acquisition of Celgene. Almost two-thirds of Celgene’s revenues come from Revlimid, which treats multiple myeloma and other cancers. But Bristol-Myers Squibb has a number of organic growth catalysts as well. The combination is that the company has performed very well as of late.
In the 2020 first quarter, Bristol-Myers Squibb’s adjusted earnings-per-share increased 56%, thanks largely to an 82% increase in quarterly revenue. The addition of Celgene fueled most of the company’s growth in the first quarter, but even excluding the acquisition of Celgene, revenue increased 8% year-over-year.
Among the company’s best-performing products so far this year is Eliquis, which grew sales by 37% last quarter. Eliquis has become the top oral anticoagulant in several international countries and will likely reach $10 billion in sales this year. Separately, rheumatoid arthritis drug Orencia generated 12% sales growth.
Value, Growth and Dividends
Bristol-Myers Squibb expects continued growth in the years ahead. The company reaffirmed previous guidance of adjusted earnings-per-share in a range of $6.00 to $6.20 for 2020. For the following year, Bristol-Myers expects 20% adjusted earnings-per-share growth in 2021.
And yet, the stock appears undervalued, trading for a 2020 price-to-earnings ratio of 9.5. We believe a P/E ratio below 10 is significantly below fair value, considering the company’s strong brands, top position in the Big Pharma industry, and future growth potential. Our fair value estimate is a P/E ratio of 13.5.
Bristol-Myers Squibb stock has a 3.1% dividend yield, which is significantly above the 2% average dividend yield of the broader S&P 500 Index. There should be plenty of room for Bristol-Myers Squibb to continue increasing its dividend in the years ahead, due to the company’s expected earnings growth, as well as the fact that the projected payout ratio for this year is just 30%.
Bristol-Myers Squibb is also a recession-resistant stock, which is ideal for defensive investors who may be concerned now that the U.S. economy officially entered a recession in 2020. The company navigated the previous economic downturn, dubbed the Great Recession, exceptionally well. From 2008 to 2010, Bristol-Myers Squibb grew its diluted earnings-per-share from continuing operations each year, from $1.35 to $1.79 over the three-year period.
This bodes well for the current economic downturn, as the company has a very strong track record of navigating recessions. After all, consumers will still need to purchase necessary pharmaceutical products, even in a recession.
With the U.S. economy entering a recession in 2020, it may be an opportune time for investors to refocus their portfolios on high-quality large cap dividend stocks. Bristol-Myers Squibb has multiple margins of safety for risk-averse investors, such as its premier business model, future growth potential, and attractive valuation and dividend yield.
Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.
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