Good investing is largely about making educated projections.
Day traders want to buy a stock this morning that they can sell for a profit this afternoon (if not sooner). If their research does not indicate such a quick-turn gain is highly likely, they will pass on the stock.
Most folks saving for retirement make educated projections about individual stocks or mutual funds that they believe will grow over time.
They want to accumulate assets they expect to spend down after they’ve left the workforce.
Dividend Growth Investing practitioners (like me) usually seek companies that will raise annual payouts to shareholders every year.
I firmly believe it is easier to make an educated projection about a company’s dividend than about its share price, and that’s one reason I like DGI.
For example, spice-maker McCormick & Co. (MKC) has been raising its dividend annually for 32 years. While there are no guarantees, projecting that MKC will continue growing its payout – regardless of the ups and downs of its stock price – seems reasonable.
Sometimes, I like to challenge myself by making educated projections about companies that are nowhere near Dividend Aristocrat status now but have what it takes to eventually join stalwarts like MKC in the 25+ Year Club.
And so today, I present the company that will launch DTA’s Income Builder Portfolio:
Come next Tuesday, Jan. 16, when the market re-opens after the Martin Luther King Day holiday, I will be buying about $1,000 worth of the biotechnology giant for the real-time, real-money DGI portfolio we are building from scratch.
I will get to Amgen’s growing dividend soon. First, here is Morningstar’s brief synopsis of what makes Amgen tick and why it is a worthy investment candidate:
One of the oldest biotech firms around, Amgen has built a diverse stable of older products,
new therapies, and pipeline candidates that should produce reasonable top-line
growth over time despite the onslaught of biosimilar competition. With deep manufacturing
capabilities, the firm should be a strong player in the biosimilar market as well. A
strong balance sheet and low dividend payout relative to cash flow are also attractive.
Amgen’s top products:
As an investor, there is a ton to like about Amgen’s fundamentals and business model.
It is a money-making machine, with killer return on assets and return on equity. I agree with Morningstar that the company has a “wide economic moat” – a major competitive advantage within its industry. It has thrived despite being in a highly regulated industry. Debt has risen due to acquisitions, but not dangerously so. It has improved its manufacturing efficiency in recent years.
My favorite historical data related to Amgen is its consistency of earnings growth.
Just look at that highlighted section of the F.A.S.T. Graphs earnings illustration above. Even during the dot-com bust (2000-02), Amgen’s earnings per share grew. Even during the Great Recession (2007-09), EPS went higher.
Although earnings growth could slow in the next couple of years, I’m willing to make an educated projection that Amgen will not disappoint.
Value Line gives Amgen a 1 for Safety and A++ for Financial Strength, its highest scores. Standard and Poor’s has assigned the company a solid A credit rating.
The following survey shows how bullish various stock analysts are about the company:
Morningstar includes Amgen in its Dividend Select Portfolio. Value Line has Amgen in its model portfolio for “Stocks with Above-Average Year-Ahead Price Potential,” and it cites 3-5 year appreciation potential of 50% for including AMGN in lists for “Stocks For Long-Term Gains” and “Low-Risk Stocks for Worthwhile Total Return.”
Jefferson Research’s “Financial Sonar” illustrates Amgen’s consistently strong fundamentals:
OK, But What About The Dividend?
All right, all right. This is the Income Builder Portfolio, and the main idea of this project is to present candidates to new (and existing) Dividend Growth Investing practitioners.
Amgen only started paying a dividend in 2011, but the payout has grown like crazy since then. Imagine Spud Webb turning into Shaquille O’Neal in the space of a few years!
From Year 1 to Year 2, the dividend grew 157.1%. Then 30.6% the following year. Then 29.8%. Then 29.5%. Then 26.6%. Amgen has “slacked off” with its two most recent raises – “only” 15% and 14.8%.
All of this dividend growth has lifted Amgen’s annual payout to $5.28, pushing its yield to just below 3%. That is outstanding for a company in an industry with an average yield of 0.8%. Amgen’s 5-year average is 2.1%.
According to McLean Capital Management (graphic below), Amgen continues to generate more than enough free cash flow to easily cover its dividend. In other words, there should be plenty of robust raises ahead.
No wonder Simply Safe Dividends gives AMGN a “dividend safety score” of 96 (out of 100).
Amgen closed Friday at $185.04. Its all-time high, established last year, was $191.10. Its 52-week low was $150.38.
Biotech companies can have some pretty wild price swings; as the graphic below shows, Amgen is not immune.
Despite that price volatility, I am quite certain that AMGN not only will deliver its quarterly dividend for the foreseeable future but that it also will grow its payout year-over-year.
Is it destined to be an Aristocrat? Well, Amgen would have to raise its dividend every year through 2036 to earn that status … so I admit I can’t really make an educated projection that aristocracy is a given.
Nevertheless, Amgen has demonstrated a history of excellence, an outstanding business model, financial strength, an economic “moat” and a willingness to give back to shareholders.
It’s the kind of company that most DGI practitioners can feel comfortable owning, and I’m confident that Amgen is a worthy choice for DTA’s Income Builder Portfolio.
Wrapping Things Up
My article about the execution of our Amgen purchase, along with some pertinent valuation information, will be published Wednesday, Jan. 17.
I am not a financial advisor, and this is not a recommendation to buy any stock. Each investor should conduct his or her own due diligence.
— Mike Nadel
Disclosure: I own AMGN in my personal portfolio.