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Gilead Sciences, Inc. (GILD) is a biopharmaceutical company that develops and markets therapies to treat a variety of life-threatening diseases. Founded in 1987, Gilead is now an $84 billion (by market cap) drug colossus that employs more than 13,000 people. The company’s three primary disease areas are viral diseases, inflammatory diseases, and oncology. Gilead focuses heavily on HIV and hepatitis B and C. Their HIV franchise accounted for approximately 70% of FY 2020 sales. Biktarvy, which treats HIV, is their most important drug, making up about 29% of total FY 2020 sales. Geographically, the US is by far their biggest market. The US accounted for approximately 74% of FY 2020 sales. Gilead has been, in some ways, a victim of its own success. That’s in part because they developed Sovaldi, a cure for hepatitis c.

When you cure people rather than simply treat them, that naturally leads to less product sales down the line as those cured people stop needing medicine. In addition, their somewhat narrow focus on diseases like HIV that impact a relatively small percentage of the population also limits their possible customer pool. So while Gilead should be applauded for providing life-saving treatments to people that desperately need them, investors have had to be a bit more patient with Gilead than the average pharma company. Making it easier to remain patient has been the large and growing dividend they pay to shareholders. Gilead has increased their dividend for seven consecutive years. The three-year dividend growth rate of 9.4% shows the level of growth they’re capable of delivering. And that’s paired with a market-beating yield of 4.2%. That’s in the range of what many utilities and REITs are yielding right now, which is unusual for a stock like this. I think that underscores its income appeal. This yield, by the way, is 70 basis points higher than the stock’s own five-year average yield. The P/E ratio is 16.6. That’s quite low in this market.

Moreover, the forward P/E ratio, using midpoint guidance for this fiscal year’s adjusted EPS, is only 9.6. And the yield, as noted earlier, is significantly higher than its own five-year average. So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like? Morningstar rates GILD as a 4-star stock, with a fair value estimate of $81.00. CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line. They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold. CFRA rates GILD as a 3-star “HOLD”, with a 12-month target price of $70.00. I came out somewhere in the middle this time around. Averaging the three numbers out gives us a final valuation of $75.18, which would indicate the stock is possibly 11% undervalued. Bottom line: Gilead Sciences, Inc. (GILD) is a high-quality pharmaceutical company that is set up to do well, despite low expectations. With a market-beating 4%+ yield, inflation-beating dividend growth, a low payout ratio, and the potential that shares are 11% undervalued, dividend growth investors should consider loving this unloved stock.

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