Image Source: Pixabay

High-yield stocks pay out dividends that are significantly more than market average dividends. For example, the S&P 500’s current yield is only ~1.3%.

High-yield stocks can be very helpful to shore up income after retirement. A $120,000 investment in stocks with an average dividend yield of 5% creates an average of $500 a month in dividends.

Not all high-dividend stocks are created equal. Some have secure dividend payouts while others are in questionable financial condition, leaving shareholders vulnerable to a dividend cut in a downturn.

Bristol-Myers Squibb Company (BMY) is the next stock in our ‘High Dividend 50’ series, where we cover the 50 highest-yielding stocks in the Sure Analysis Research Database.

Healthcare companies provide products and services that are needed to improve the quality of life. Demand remains even during recessionary periods, which can lead to steady growth during all phases of the economic cycle.

While high-yielding stocks can be found amongst the companies in this sector, not all are worthy of investment today.

This article will examine the prospects of Bristol-Myers as an investment opportunity.

Business Overview
 

Bristol-Myers, as it is known today, was formed in the late 1980s following a merger of Bristol-Myers and Squibb. The company can trace its roots back to 1887.

The company’s products address needs in the areas of oncology, immunology, cardiovascular, neuroscience, and hematology. Bristol-Myers has a market capitalization of $82 billion.

Bristol-Myers reported first-quarter earnings results on April 25th, 2024.

Source: Investor Relations

Revenue for the period improved 5% to $11.8 billion, which topped estimates by $330 million. Adjusted earnings-per-share totaled -$4.40, which compared unfavorably to $2.05 in the prior year, but this was $0.02 better than expected.

The earnings-per-share loss was related to the closing of several acquisitions during the quarter. This included Mirati Therapeutics, Karuna Therapeutics, and RayzeBio. These acquisitions incurred nearly $13 billion of in-process research and development charges.

Unfavorable currency exchange reduced revenue results by 1%. U.S. grew 7% to $8.5 billion while international was unchanged from the prior year.

Bristol-Myers provided updated guidance for 2024 as well. The company expects revenue to be unchanged from 2023.

Adjusted earnings-per-share are expected to be in a range of $0.40 to $0.70, down from prior guidance of $7.10 to $7.40.

The change in earnings-per-share guidance is related to the acquisitions that closed during the first quarter. We estimate earnings power at $3.50.

Growth Prospects
 

Bristol-Myers’ earnings results over the last decade have been inconsistent. The company oscillated between growth and decline early in the period.

Overall, earnings-per-share have a compound annual growth rate of almost 23% since 2013, but much of this growth has occurred over the past five years.

Like many pharmaceutical companies, Bristol-Myers generates much of its revenue from its older, more mature drugs.

Source: Investor Relations

This is a double-edged sword in some ways. Some of its products are still seeing solid to strong growth rates. For example, Eliquis, which is used to prevent blood clots, produced revenue of $3.7 billion during the first quarter, which was a 9% improvement year-over-year. This product is the largest source of revenue for the company.

On the other hand, other mature products are experiencing weaker demand and, thus, lower sales. Revlimid, which treats myeloma, was down 5% to $1.67 billion. While still a significant source of revenue, generic competition is clearly reducing the demand for the product.

There are some exciting products in the company’s growth portfolio that could become very profitable.

A good example of this is Opdualag. The drug was approved for use in the treatment of melanoma in March of 2022. Sales have not yet ramped up as it generated just $206 million in the most recent quarter, but this was a 76% increase from the prior year. The drug has already achieved a 25% market share as a first-line treatment and peak sales could reach $4 billion.

Bristol-Myers has also not been shy about adding to its core business through the use of acquisitions. Each of the acquisitions closed in the first quarter offers some assets that could prove valuable in the future.

For example, Kaurna Therapeutics has a possible treatment for schizophrenia while Mirati Therapeutics further strengthens the company’s lung cancer portfolio. RayzeBio adds to Bristol-Myers’ oncology lineup.

Besides the additions made during the last quarter, Bristol-Myers’ most significant acquisition in recent memory is the company’s 2019 purchase of Celgene for $74 billion.

This added Revlimid, which was responsible for two-thirds of Celgene’s annual revenue at the time. While this addition has aided Bristol-Myers’ sales results, the declines for Revlimid have been steep following the loss of patent protection in 2022.

We expect earnings growth of 3% annually through the end of the decade.

Competitive Advantages & Recession Performance
 

Healthcare companies are often more recession-proof than those in more cyclical sectors as demand remains for products and services.

Like its peers, Bristol-Myers also benefits from patent protection on many of its products, which allows the company’s products years of growth largely unchallenged by the competition.

However, sales for these products can decline substantially once the patent expires and generic competition can cause prices to decline. This has been the case for Revlimid.

To offset this eventual patent cliff, Bristol-Myers spends heavily on research and development, including $9.3 billion last year alone. R&D is the lifeblood of a pharmaceutical company as this capital investment helps to find new products, conduct trials, bring new drugs to market, and seek additional approvals for treatment.

Bristol-Myers has used its ability to find new products to help the company navigate economic downturns, such as the Great Recession:

• 2007 adjusted earnings-per-share: $1.04
• 2008 adjusted earnings-per-share: $1.49 (43% increase)
• 2009 adjusted earnings-per-share: $1.85 (24% increase)

The company greatly improved its adjusted earnings-per-share, driven in large part by the revenue growth that occurred during each year during this time.

Adjusted earnings-per-share surged 37% during 2020 despite the headwinds from the Covid-19 pandemic. Much of this growth was aided by the addition of Celgene.

Pro forma revenue still grew 7% for the year, showing that Bristol-Myers has proved highly resilient to recessionary periods.

Dividend Analysis
 

Bristol-Myers has raised its dividend for 17 consecutive years. For quite a long period of that time, the company provided a dividend increase of just $0.01 per share per quarter.

That changed following the addition of Celgene as shareholders began to see higher rates of growth, including a nearly 10% increase during the first year of the combined companies.

Bristol-Myers’ dividend growth has slowed slightly over the last two years, but the annual raises have been in the mid-single-digit range. This is still above the minimal raises that the company used to provide. The dividend has a CAGR of 8.6% since 2019.

It is likely that the pace of dividend growth will continue to slow due to an elevated payout ratio. Using our earnings power estimate for the year, the payout ratio is forecasted to be 69%, which would be the highest payout ratio since 2015. We project that dividend growth will be 5% annually through 2029, below the medium-term increase.

Shares of the company yield 5.9%, which is among the highest yields for the stock in the last decade. The typical yield has been in a range of low 2% to low 3% for much of the last 10 years, so investors are receiving a much more generous yield than usual.

Final Thoughts
 

Bristol-Myers is a leading name in healthcare as the company has a portfolio of top drugs. Some of the more important drugs are experiencing challenges from generic competition, which has impacted results.

The company does have some ways to grow, such as extensive research and development spending and the ability to add to its core business through acquisitions.

The stock also has a much higher-than-usual yield that we believe to be safe.

That said, Bristol-Myers is not expected to see much more than marginal earnings growth over the next five years and trades above our target valuation, earning the stock a hold rating.

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