Is Bristol's Dividend Safe

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Bristol-Myers Squibb (NYSE: BMY) is one of the globe's top drugmakers and is a staple in dividend investors' portfolios.That's because big drug companies like Bristol-Myers, Johnson & Johnson (NYSE: JNJ) and Merck (NYSE: MRK) offer investors predictable, dividend-boosting revenue regardless of the economy's whims and whispers. But investors are correct to wonder if Bristol-Myers dividend can continue following the loss of patent protection on its top selling drug Plavix two years ago and in light of billions more in at-risk revenue tied to future patent expiration.
In the following slideshow you'll see whether I think Bristol's dividend is safe and gain insight into how Bristol matches up with industry peers.

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Is Bristol's Dividend Safe

  1. 1. Is Bristol-Myers Dividend Safe?
  2. 2. Is Bristol-Myers dividend safe? 1. Patent expiration – Bristol lost exclusivity on its top selling cardiovascular drug Plavix in 2012. • Sales of Plavix have fallen from $2.5 billion in 2012 to just $258 million in 2013. • Roughly $3 billion in sales face patent expiration by the end of 2015. 2. Shrinking margin – Bristol’s operating margin has slumped from nearly 32% in 2010 to less than 20% in the first quarter. 2 big and important question marks hang over Bristol’s dividend.
  3. 3. Patent expiration • Bristol’s sales have fallen in the past year, but removing the impact from Bristol exiting its diabetes business results in Bristol’s sales actually growing 5% in the past year. That said, Bristol has significant patent risk. Baraclude, its $1.5 billion a year hepatitis B drug could face generics in the U.S. within the next year, putting nearly $300 million in U.S. sales at risk. More worrisome is the risk to its $2.3 billion a year Abilify, which loses protection worldwide in the next year. Bristol also loses protection on its $1.6 billion a year HIV drug Sustiva in 2015. First, let’s consider Bristol’s patent calendar.
  4. 4. Shrinking margin Now, let’s take up the issue of falling margin. Plavix lost sales meant that Bristol’s expense line quickly became too big, particularly given expensive late stage trials for next generation drugs were kicking off. As a result, Bristol sold its half of its diabetes franchise to its partner AstraZeneca in a deal that could be worth more than $4 billion, plus annual royalties. Additionally, the move shifts 4,000 workers fully to AstraZeneca, helping cut costs. However, whether those cost cuts are deep enough to offset sales lost to upcoming patent expirations remains to be seen.
  5. 5. Reasons for dividend optimism 1. A maturing pipeline of new products – Sales of cancer drug Yervoy grew 36% to $960 million. – Sales of leukemia drug Sprycel grew 26% to $1.28 billion. – Sales of rheumatoid arthritis drug Orencia grew 23% to $1.4 billion. – Bristol’s pipeline includes a host of promising drugs. • Cancer drug nivolumab • Hepatitis C drugs daclatasvir & asunaprevir 2. Flush with cash – Following the diabetes sale, Bristol has $10 billion in cash on its books. Bristol is working its way through its operational challenges and new products and a healthy balance sheet boost investor confidence.
  6. 6. Cash dividend payout Bristol’s cash dividend payout ratio, a measure of how much of its operating cash after paying for capital expenses and preferred dividends, is more worrisome than it is at peers given that at 57% its higher than both Merck and Johnson & Johnson. That payout rate becomes particularly concerning in the face of looming patent expiration.
  7. 7. Current yield Bristol’s current dividend yield of 2.9% is lower than Merck and higher than Johnson’s, but given Bristol’s significant patent headwind either of those two competitors may prove a safer bet for dividend growth than Bristol given its upcoming patent risk.
  8. 8. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

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