Gilead Sciences (GILD) initiated a dividend only in 2015 and hence it passes under the radar of most income-oriented investors.

However, the stock is offering an all-time high dividend yield of 5.0% while it is also trading at a forward price-to-earnings ratio of 9.1.

In this article, we will analyze the prospects of Gilead Sciences.

Business Overview

Founded in 1987, Gilead Sciences is a biotechnology company that operates with a clear focus on antiviral medication and treatments. Its main products include treatments for HIV, Hepatitis B, and Hepatitis C (HBV/HCV), but Gilead has also ventured into other areas, such as oncology.

Gilead has exhibited lackluster business performance in the last six years, as it has failed to grow its earnings during this period. The company posted record earnings per share of $11.91 in 2015 thanks to its admirable breakthrough in the treatment of HCV but its earnings have declined significantly since then.

The reason is the fact that the treatment of HCV cures patients and hence the patient pool has been on a steady decline.

In the fourth quarter, Gilead exhibited lackluster business performance. Biktarvy, the drug with the greatest volume sales, grew its revenues 22% over the prior year’s quarter but other drugs incurred material declines in their sales.

HCV product sales remained in a downtrend while Veklury (remdesivir), the treatment against COVID-19, incurred a 30% decrease in its revenues, as its sales were much higher in the prior year’s quarter thanks to the absence of COVID-19 vaccines and other treatments.

Moreover, Truvada and Atripla saw their sales plunge 58% and 29%, respectively, due to the loss of exclusivity in the U.S. in late 2020. Overall, Gilead posted a 2% decrease in its total revenues and a 15% decrease in its adjusted earnings per share in the fourth quarter.

Even worse, management provided poor guidance for 2022. It expects total sales of $23.8-$24.2 billion, which represent an approximate 12% decrease. Management also expects adjusted earnings per share of $6.20-$6.70. At the mid-point, this guidance implies an 11% decrease vs. 2021.

Growth Prospects

An important milestone in the history of Gilead was its acquisition of Pharmasset for $11 billion in 2011. Thanks to that acquisition, the company came up with a therapy of HCV three years later and posted record earnings in 2014 and 2015, with gross profit margins close to 90%.

However, as the HCV drugs of Gilead cure patients, the patient pool has been on a steady decline since then. Consequently, Gilead has incurred a sustained decline in its bottom line in the last six years, for a total decrease of 39% between 2015 and 2021.

As evidenced by the aforementioned uninspiring guidance of Gilead, 2022 will be another year with lower revenues and earnings, as there are no near-term growth catalysts on the horizon right now.

The use of Remdesivir in the treatment of COVID-19 patients provided some relief to Gilead in 2020 and early 2021 but its use has greatly decreased in recent quarters, as vaccines and other treatments have taken their toll on the use of this drug.

The brightest spot right now is the fact that Gilead owns the commercialization rights for Filgotinib, developed by Galapagos, which has a good chance of becoming successful in several immunotherapeutic indications.

Overall, the business performance of Gilead is highly unpredictable. In the absence of a major breakthrough, the company is likely to keep posting lackluster results.

On the other hand, as evidenced by the HCV drugs of the company, one major breakthrough is sufficient to lead the earnings of the company to skyrocket.

Competitive Advantages

In the HIV market, which is in a reliable growth trajectory worldwide, Gilead continues to be the market leader, holding a large market share. It is unlikely that Gilead will lose its leading market position, as the other major players have no interest in engaging in a price war.

Moreover, Gilead spends excessive amounts on research & development (R&D) year after year. To be sure, the company spent $4.9 billion in 2020 and $5.4 billion in 2021 on R&D.

As these amounts comprise approximately 20% of its annual sales, it is evident that the company is investing heavily to enhance its expertise.

On the other hand, the pharmaceutical industry is well-known for its intense competition and the collapse in profit margins after the expiration of patents.

Gilead is currently doing its best to come up with its next blockbuster success, like its breakthrough in the therapy of HCV in 2014, but it is impossible to predict if and when such a success will repeat.

Dividend Analysis

Gilead Sciences started to pay a dividend in 2015 and has raised its dividend every year since then. Notably, the stock is currently offering an all-time high dividend yield of 5.0%. The high yield has resulted, not only from the annual dividend hikes of the company, but also from the poor performance of the stock price in the absence of growth catalysts.

Due to a combination of a high-single-digit dividend growth rate and declining earnings per share, the dividend payout ratio of the stock has risen substantially in recent years, from 11% in 2015 to 45% right now. We expect Gilead to put a stop on the downtrend of its bottom line at some point in the next few years.

In addition, the company has a solid balance sheet, with a strong interest coverage ratio of 11 and net debt of $35.0 billion, which is only 6 times the annual earnings.

As a result, we view the dividend of Gilead as safe for the foreseeable future. That said, investors should not expect much higher dividend growth than the 3.5% average annual growth experienced in the last two years.

Final Thoughts

Gilead is offering an all-time high dividend yield of 5.0% and is trading at a forward price-to-earnings ratio of 9.1. Unfortunately, there are good reasons behind these seemingly attractive features of the stock. The company has been a victim of its own success in recent years, as its HCV drugs have greatly reduced the remaining number of patients.

In the last five years, the stock of Gilead has shed 14% whereas the S&P 500 has rallied 86%.

Given a healthy payout ratio of 45% and a solid balance sheet, the dividend of Gilead can be considered safe for the foreseeable future. However, as there are no strong growth catalysts on the horizon right now, investors should be aware that the stock may continue to underperform the broad market by a wide margin.

Overall, the stock is offering a high dividend yield but uninspiring growth potential and hence it is unreliable and speculative right now.