When a Company’s earnings continue to grow, but the Company’s stock price continues to be flat or on a downtrend, I get very excited. The reason why I get excited is that I know in the long term, price follows earnings. As long as the underlying fundamentals of the business grow, the stock price will follow. The perfect example is when Johnson & Johnson (JNJ) was flat in the $60 to $65 per share range at the end of 2009 up to mid-2012 when it finally broke out. During this time, JNJ was still growing earnings. Now JNJ is selling for $160 per share. This would have been about an 11.5% annualized total return. In today’s post, I have another company that is trading in a price range while earnings continue to grow at the double-digit rate. I want to discuss a high-quality company that has continued increasing profits and is continuing to raise its dividend. All while the price of the stock is flat. That company is Bristol-Myers-Squibb (BMY), a large-cap pharma with solid dividend growth.

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Overview of Bristol-Myers Squibb

Bristol-Myers Squibb is an American pharmaceutical company that was founded in 1887. Today, the Company manufactures prescription pharmaceuticals and biologics in several therapeutic areas, including cancer, HIV/AIDS, cardiovascular disease, diabetes, hepatitis, rheumatoid, arthritis, and psychiatric disorders. BMY has strengths in oncology and hematology. Top selling drugs include REVLAMID (multiple myeloma), ELIQUIS (cardiovascular), OPDIVO (oncology), ORENCIA (rheumatoid arthritis and psoriatic arthritis), POMALYT (hematology), SPRYCELL (hematology), YERVOY (oncology), and ABRAXANE (oncology). The top three drugs provide over $28 billion in revenue. BMY acquire Celgene in 2019. The Company has a market capitalization of $142.84 billion and currently trades hands for $63.94 per share.

Source: Bristol-Myers Squibb Q4 2020 Results

Bristol-Myers Squibb Dividend History, Growth, and Yield

Since BMY is in the pharmaceutical industry, the COVID-19 pandemic did not hurt the Fiscal Year’s performance FY2020. It also did not affect the Company’s dividend, as many other companies had to cut or suspend their dividend during the COVID-19 pandemic. Let’s discuss more about BMY’s dividend and the safety of the dividend.

Bristol-Myers Squibb Dividend Growth

BMY has been paying a dividend for 31 years. But in the last 15 years, the Company has been growing the dividend every year making the stock a Dividend Contender. BMY’s past 5-year dividend growth average is approximately 4%, and the previous 10-year average is about 3.5%. Now, these dividend growth rates are nothing to be excited about. However, the most recent dividend increase was announced in December of last year. The most recent dividend increase was 9%—almost three times the trailing ten-year average. Let’s not forget that BMY grew its dividend during the most challenging period for dividend growth stocks in recent history. Where many businesses and industrial companies were cutting or suspending their dividends payments, BMY raised the dividend three times its own ten-year average. That is very impressive.

Bristol-Myers Squibb Dividend Yield

The Company has a dividend yield of 3.07% as of this writing. This is not great for investors who are looking for income right now. Income-driven investors may want a 4.5% yield or higher. However, a 3.07% dividend yield and a growth in the high single digits every year would be excellent for investors who do not need the income right now and can continue to reinvest the dividends. Furthermore, the yield is a lot higher than the current S&P 500 dividend yield of 1.53%.

Bristol-Nyers Squibb Dividend Safety

BMY’s current dividend yield is higher than its own 4-year average dividend yield of 2.97%. I like to look at this metric because it gives me a good idea if a company that I am researching is undervalued or overvalued based on the current yield and 4-year average yield. Price and yield correlate with one another. If the price goes higher, then the yield goes lower. Vice versa as well. The current yield is also higher than the trailing 5-year average of 2.88%.

Source: Portfolio Insight

Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. This is why it is important to look at the dividend payout based on earnings and free cash flow (FCF).

Earnings are expected to be $7.48 per share for FY2021. Currently, BMY pays out a $1.84 dividend per share. Based on earnings, this is a dividend payout ratio of 25%. This tells me that the dividend is very safe, and the Company has much more flexibility to continue to raise the dividend for years to come.

Next, let’s look at the dividend coverage based on FCF. Analysts predict that BMY will make $5.89 per share in free cash flow. Using the same dividend payment gives us a payout ratio of 31% based on FCF. Another great indicator that the dividend is safe and very well covered.

Bristol-Myers Squibb Revenue and Earnings Growth / Balance Sheet Strength

Now let’s talk about earnings and revenue growth, which are the major parts of metrics I like to evaluate a company. Without revenue growth, a company can’t have sustainable earnings growth and cannot continue paying out a rising dividend. 

For the past ten years, BMY has grown revenue at a Compound Annual Growth Rate (CAGR) of 8.1%. However, in FY2020, the Company grew revenue by over 62.6% when compared to FY2019. The acquisition of Celgene drives the growth in revenue. I see continued revenue growth because of the investment in Celgene and the drug pipeline.

Earnings have been growing 11% annually for the past ten years. Last year’s earnings grew a whopping 37%, from $4.69 per share in 2019 to $6.44 per share. Even after the earnings growth, BMY stock price did not budge much. This is why I am very excited to continue to add more shares of this Company to my portfolio. 

Also, The Company has a solid balance sheet. Currently, BMY has a Standard & Poor’s credit rating of A+, which is investment grade—at the same time, sporting a low debt-to-equity ratio of 1.4X, which meets my criteria of 1.5X or lower. Overall, this shows me that BMY is a high-quality company with excellent growth prospects and a solid balance sheet.

Bristol-Myers Squibb Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower P/E based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of all the future cash flow that that business can provide.

Let’s first look at the P/E ratio. Currently, BMY has a P/E ratio of 8.4X based on fiscal year 2021 earnings of $7.48 per share. The P/E is very low compared to the past 5-year P/E average of 15.7X. If BMY were to revert back to a P/E of 15X, we would obtain a estimated fair value price of $112.20 per share.

Now let’s look at the dividend yield. Like I mentioned, the dividend yield currently is 3.07%. Looking at Bristol-Myers’s own 5-year dividend yield average of 2.88%, there is a potential upside. For example, if BMY were to return to its dividend yield mean, the price target would be roughly $69.50.

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. That projected dividend growth rate is higher lower than its 10-year average but lower than the most recent increase. This gives us a estimated fair value price target of $69.91 per share.

If we average the three estimated fair value price targets of $112.20, $69.50, and $69.91, we obtain a reasonable price of $83.87 per share. This gives BMY a possible upside of ~31% from the current price of $63.94. This chart below is from StockRover*.

Source: StockRover*

Conclusion on BMY – Large-Cap Pharma Dividend Growth

BMY is a global biopharmaceutical company that just took on a compelling investment by acquiring Celgene, which will drive future growth. With a market-beating yield, accelerating dividend growth, a low payout ratio, more than a decade of consistent dividend increases, and the potential that shares are about 31% undervalued, dividend growth investors should consider this stock before that market recognizes its value.