The Squibb predecessor to Bristol-Myers Squibb Co. (BMY) was founded in 1858, and the Bristol-Myers predecessor in 1887. They merged in 1989.
Following over a century of growth, acquisitions, and strategic refocus, Bristol-Myers Squibb today is a global biopharmaceutical giant. It employs about 30,000.
Last November, 2019, BMY completed its acquisition of Celgene, which is now a wholly owned subsidiary, for about $80 billion. It was one of the largest pharmaceutical mergers in history, and it immediately raised BMY’s annual sales by about 50%.
Bristol-Myers’ Dividend Record
BMY’s yield has been moving back and forth around the 3% line for awhile. It’s not because they’ve changed their payout. The yield changes are caused by price changes.
Healthcare is generally considered a defensive sector, and recent price action in the volatile market has supported that status. This chart shows price returns since the volatile coronavirus market volatility began after the market’s all-time high on February 19.
After years of $0.04-a-share annual increases, BMY in February raised its dividend by nearly 10%. The last time the company made an increase that large was in 2008.
It froze its dividend for one year in 2009, during the Global Financial Crisis.
At that time, the company was also in the midst of major restructuring to transform itself from a diversified pharmaceutical company into a focused biopharmaceutical company.
I would classify BMY as a mid-yield, mid-growth company. If it were to continue with dividend raises like this year’s 9.8%, it would become a fast-growth proposition. It’s too early to know that yet.
The high safety score from Simply Safe Dividends, based on their analysis of factors that impact dividend sustainability, suggests that BMY’s dividend is safe and unlikely to be cut.
Bristol-Myers Squibb’s Business Model and Company Quality
BMY is a world-wide biopharmaceutical giant. It competes with other research-based drug companies, smaller research companies, and generic drug manufacturers.
BMY’s products are sold worldwide, principally to wholesalers and specialty distributors, and to a lesser extent to retailers, hospitals, clinics, government agencies, and pharmacies. About 59% of revenues come from the USA and 41% from the rest of the world.
After last year’s acquisition of Celgene, BMY continues to operate in one segment: Biopharmaceuticals. BMY has stated that it believes that its combination with Celgene will enable it to create a leading biopharmaceutical company that is well-positioned to address the needs of patients with cancer, inflammatory, immunologic, cardiovascular, or fibrotic diseases.
The company has several products in the blockbuster category (sales over $1 billion annually). The three marked with asterisks in the display below were acquired in the Celgene acquisition.
[Source: Investor presentation February 2020]
In addition to drugs already on the market, BMY is considered to have a strong pipeline of drugs in various stages of development. The company has spent more than $6 billion per year over the past three years on R&D activities. Over half of its late-stage pipeline drugs are in the immunology and cancer areas. It is optimistic about identifying new treatments using its oncology drug OPDIVO.
BMY’s principal strategy is to combine the resources, scale, and capability of a pharmaceutical company with the speed and focus on innovation of the biotech industry. Most of BMY’s revenues come from products in the therapeutic classes of hematology, oncology, cardiovascular, and immunology.
BMY incurred significant debt in connection with the Celgene transaction, and it stated in its earnings release in February that it is committed to reducing that debt while still remaining focused on broadening its portfolio of marketed medicines and pipeline assets.
The company believes that it is positioned well for long-term growth:
Morningstar awards BMY a wide moat, meaning that it has significant competitive advantages. Their assessment is based on several factors, including:
- BMY’s broad lineup of patent-protected drugs, which confers both pricing power and a time cushion to move its developmental drugs along in the pipeline
- Entrenched salesforces, which confers an advantage over companies that lack a distribution channel
- Economies of scale
Value Line gives Bristol-Myers Squibb its highest financial grade, A++. In this section, we’ll do our own analysis.
Return on Equity (ROE) is a standard measure of financial efficiency. ROE is the ratio of profits to shareholders’ equity.
The average ROE for all Dividend Champions, Challengers, and Contenders is 12%-13%, and for S&P 500 companies it is about 14%. The following chart shows BMY’s ROE 2010-2019.
[Source of all yellow-bar charts in this section: Simply Safe Dividends]
BMY’s ROE has varied from year to year, with high years in the 30s and one low year in single digits. Its average has been around 20%, with 6 of 10 years above the 14% threshold.
Debt-to-Capital (D/C) ratio measures how much a company depends on borrowed money. Companies finance their operations through a mixture of debt, equity (shares issued to the open market), and their own cash flows.
A typical D/C ratio for a large, healthy company is 50%. D/C is a measure of financial risk. All else equal, stocks with high D/C ratios are riskier than those with low D/C ratios.
BMY took on about $19 billion in new debt for its acquisition of Celgene, which accounts for the D/C jump in 2019. It has made debt reduction a strategic priority.
Even with that recent run-up in debt, BMY’s long-term approach to debt has been, by modern standards, modest. That is a positive factor. It’s only in the past year that its debt level has entered the average range for large companies.
As noted earlier, BMY has a good investment-grade credit rating.
Operating margin measures profitability: What percentage of revenue is turned into profit after subtracting cost of goods sold and operating expenses?
Per recent research, typical operating margins for S&P 500 companies have been in the 11-12% range.
Bristol-Myers’ profit margins have been outstanding. They have typically run in the 20%+ range, which is twice the overall average for large companies.
Earnings per Share (EPS) is the company’s officially reported profits per share. We want to see if a company has had years when it officially lost money, or if its earnings are steadily increasing, declining, or flat.
BMY shows a lot of variability in its reported earnings, but for the past decade they have always been positive. It’s hard to spot a trend, except to note that 3 of the past 4 years have been higher than the prior 6 years.
Free Cash Flow (FCF) is the money left over after a company pays its operating expenses and capital expenditures. Whereas EPS is subject to GAAP accounting rules, cash flow is a more direct measure of money flowing through the company. It’s the cash a company has available for dividends, stock buybacks, and debt repayment.
BMY has compiled a strong record of free cash flow, including sharp rises in each of the past four years.
Share Count Trend shows whether the company’s outstanding shares are increasing in number, decreasing, or remaining flat.
I normally like declining share counts, because the annual dividend pool is spread across fewer shares each year. That makes it easier for a company to maintain and increase its dividend. By buying back its own shares, the company is investing in itself, expanding each remaining share into a larger piece of the pie, and improving all per-share statistics.
A by-product of declining share counts is that the same pool of dividend dollars will support per-share dividend increases year after year.
BMY has not been retiring shares regularly. In fact its share count at the end of 2019 is virtually identical to what it was 9 years earlier.
The positive side of this, of course, is that unlike many companies that have been in the news lately, BMY has not been borrowing excessively to support share buybacks. As we saw earlier, BMY’s debt levels have been modest for years.
Here is a summary of the items above:
This is a very good picture, although I don’t think it rises to the A++ level awarded by Value Line. BMY comes across as being solid in its financial management. Its profitability is outstanding, and its record of controlling debt stands out somewhat among American companies over the past decade.
I would give BMY an above-average “B” on its financials on an ordinary A-F scale.
Earlier this year, at the presentation of its Q4 and full-year 2019 results, BMY displayed this slide, indicating that it believes that, with the Celgene acquisition under its belt, the company has a positive financial outlook for the next few years. BMY’s Q1 2020 earnings reports are scheduled for May 7, 2020.
Bristol-Myers’ Stock Valuation
The quality and business strength of a company is one thing. The valuation of its stock is another. We want to buy stocks that are undervalued whenever possible.
As often happens, we find good valuations (and better yields) among stocks whose market price has stalled out.
In the graph below, notice that BMY’’s price took a dive in 2016, even though its earnings improved 41%. Overall, BMY’s price dropped significantly from mid-2016 to mid-2018, despite positive EPS results.
Then its price reversed, going back up, and it has not been badly harmed during the pandemic volatility.
With that background, let’s check BMY’s current valuation. I use four valuation models, then average them out.
Model 1: FASTGraphs Basic. The first step is to compare the stock’s current price to FASTGraphs’ basic estimate of its fair value.
The basic model usually uses a price-to-earnings (P/E) ratio of 15, which is the historical long-term P/E of the stock market, to create a fair-value reference line. When a company had had a high rate of increasing earnings, as in BMY’s case, the model adjusts the reference line to reflect increased expectations, because fast-growing companies are generally considerd to merit higher valuations.
In the following chart, the fair-value reference line is orange, and the black line is BMY’s actual price. I highlight both the reference P/E ratio and BMY’s current P/E ratio.
Since the black price line is beneath the orange reference line, BMY is undervalued according to this model.
To calculate the degree of undervaluation, we make a ratio from the P/Es.
Calculating Valuation Ratio from FASTGraphs
Actual P/E ratio / Reference P/E ratio
12.2 / 18.9 = 0.65
That suggests that BMY is undervalued by 35%. We calculate the stock’s fair price by dividing the actual price by the valuation ratio. That gives us $62 / 0.65 = $95 for a fair price.
Valuation is an estimate or assessment, not a physical trait like length or width. We are making a forecast based on both data and judgement. That’s why I use several models.
Model 2: FASTGraphs Normalized. In the second valuation model, we compare BMY’s current P/E to its own long-term average P/E.
The reference line is now blue, and it is drawn at BMY’s 5-year average P/E ratio of 21.7. Using the same formulas as in the first step, we get:
- Valuation ratio = 12.2 / 21.7 = 0.56, suggesting 44% undervaluation
- Fair price = $62 / 0.56 = $111
Step 3: Morningstar Star Rating. Morningstar takes a different approach to valuation. They ignore P/E ratios and instead use a discounted cash flow (DCF) model for valuation. The DCF model is based on the idea that a company is worth all of its future cash flows, discounted back to the present to reflect the time value of money.
Obviously, no one actually knows a company’s future cash flows. Estimates must be used. My experience with Morningstar is that they have a careful, comprehensive, and conservative process for determining the inputs that they use in their DCF formulas.
Morningstar rates BMY as just slightly undervalued (by 3%), and they calculate a fair price of $64.
Step 4: Current Yield vs. Historical Yield. My last model compares the stock’s current yield to its historical yield. This relative-yield method of estimating fair value is based on the idea that if a stock’s yield is higher than usual, it may indicate that its price is discounted.
This chart shows BMY’s current yield (green dot) compared to its 5-year average yield (black line).
[Source: Simply Safe Dividends]
BMY’s current yield of 3.0% is 11% above its 5-year average yield.
Calculating Valuation Ratio by Comparing Yields
5-Year Average Yield / Current Yield
2.7% / 3.0% = 0.90
Using that valuation ratio, the fair price under this model is $62 / 0.90 = $69.
We see more of a split among the models than normally. For that reason, I have termed BMY’s overall valuation as “Undervalued,” even though its calculated 27% discount would usually be called “Significantly Undervalued.”
In any event, I would say that Bristol-Myers Squibb is somewhat discounted at the current time. The degree of discount has narrowed just in the last couple weeks of trading.
Beta measures a stock price’s volatility relative to the S&P 500. I like to own stocks with low volatility for two reasons:
- They present fewer occasions to react emotionally to rapid price changes like price drops that can induce a sense of fear.
- There is research that suggests that low-volatility stocks outperform the market over long time periods.
BMY’s 5-year beta is 0.85, which means its volatility has been, on average, 15% less than the market’s. This is a slightly positive factor.
In their most recent report on BMY, CFRA gathered the recommendations of 18 analysts covering the stock. Their average recommendation is 4.0 on a 5-point scale, where 4 = buy. This is a positive factor.
The Bottom Line
- Good dividend resume: 3.0% yield, 11 straight years of growth, most recent increase nearly 10%, and high dividend safety score of 79 out of 100 points.
- Biopharmaceutical giant with strategy centered on branded drugs with high profit margins; benefits from economies of scale.
- Good to Excellent business quality ratings across the board.
- Celgene acquisition grew revenues by 50% immediately, and analysts project high growth over the next few years.
- Solid financials highlighted by moderate debt, high profit margins, and consistently positive profits. Value Line rates BMY’s financial strength as A++.
- Share price has rebounded since initial fast drop as coronavirus/covid realities hit the market.
- Shares are more than 20% undervalued.
- Celgene acquisition required taking on more debt than usual. BMY has committed to lowering that debt burden.
- Celgene acquisition must be integrated into BMY’s overall operation.
- Revenue is concentrated among a relatively few number of products. Top 10 products produce 91% of revenue.
As all investors are now aware, the coronavirus/covid conditions make all projections for any business at least somewhat speculative. That said, healthcare businesses tend to hold up better under difficult macro conditions, including recessions.
In my opinion, at its current pricing, Bristol-Myers Squibb presents an attractive investment proposition for a high-quality company. Besides being in the healthcare sector, which is generally resilient, BMY’s historically conservative approach to debt means that it enters difficult times with a more solid balance sheet than many other companies.
Nothing in this article is intended to be investment advice. This is not a recommendation to buy, hold, or sell Bristol-Myers Squibb. Always do your own due diligence. Consider not only the company’s quality, dividend record, and financial characteristics, but also about how it fits your personal financial goals.
— Dave Van Knapp
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