Bristol-Myers Squibb (BMY) is a pharmaceutical giant. Its mission is elegantly stated:
Bristol Myers Squibb is a global biopharmaceutical company whose mission is to discover, develop and deliver innovative medicines that help patients prevail over serious diseases.
How does BMY check out as a dividend-growth investment? Let’s take a look, beginning with its dividend.
BMY’s Dividend Record
BMY is a mid-yield, mid-growth DG stock. The only thing holding it back from a higher overall grade is its moderate yield combined with its slow 5-year dividend growth rate.
BMY’s most attractive dividend features are its decent yield, safe dividend, and the recent acceleration in its dividend growth rate.
The safety of its dividend is indicated by its 79/100 safety score from Simply Safe Dividends. That score was just reaffirmed in May, after the company’s first-quarter earnings release. The score is just two points short of a Very Safe rating.
These graphs from Simply Safe Dividends illustrate that BMY is not paying out an excessive share of its profits or cash flow, which means that it appears to have a good runway for maintaining and increasing its dividend.
BMY’s most recent dividend increase (paid in early 2021) was 8.9%. If the company were to maintain that rate of increase for a couple more years, I would reclassify it as a mid-yield, fast-growth stock.
On the following spreadsheet snip, you can see the acceleration of BMY’s dividend growth rate over the past few years.
Business Model and Company Quality
Bristol-Myers Squibb was first incorporated in 1933 under the name Bristol-Myers Company, as the successor to a business started in 1887. In 1989, it became Bristol-Myers Squibb as a result of a merger.
Two recent major acquisitions have grown the company:
- Celgene in 2019.
- MyoKardia in 2020.
BMY operates in one segment—Biopharmaceuticals. The company is engaged in the discovery, development, licensing, manufacturing, marketing, and distribution of biopharmaceutical products on a global basis.
BMY’s principal strategy is to combine the resources, scale, and capabilities of a pharmaceutical company with the speed and innovation of the biotech industry.
BMY’s major areas of focus are serious diseases: oncology (both solid tumors and hematology), immunology, cardiovascular, and fibrosis.
This model (available from E-Trade) shows how one quantitative research company (Trefis) breaks down the contribution of BMY’s major business segments into its estimated intrinsic value:
Bristol’s three largest drugs are Revlimid (myeloma cancer), Eliquis (blood thinner), and OPDIVO (various cancer types). They accounted for 67% of the firm’s sales through the first half of 2020.
BMY’s products are sold worldwide, primarily to wholesalers, distributors, specialty pharmacies, retailers, hospitals, clinics, and government agencies. In 2020, BMY’s revenues came from:
- United States—63%
- Rest of world—14%
Morningstar awards BMY a Wide moat, meaning that it has long-lasting competitive advantages. The primary factors are:
- Strong lineup of patent-protected drugs, which confers not only pricing power, but also time to bring out newer drugs as older patents expire.
- Entrenched salesforce, which not only helps sell its own products, but gives it leverage to partner with smaller drug companies to market their products.
- Economies of scale that enable strong stable cash flows.
We just saw that Value Line assigns a Financial Strength rating of A++ to BMY, which is not only Value Line’s highest grade, but they also consider BMY to have the strongest financials among 11 peer companies, such as Merck (MRK), Novartis (NVS), and AbbVie (ABBV).
Let’s take a deeper look for ourselves at BMY’s financials.
BMY’s sales were on a steady upward trend for several years, and then the Celgene and MyoKardia acquisitions produced a big boost in 2020.
(Source of all graphics in this section: Simply Safe Dividends)
BMY’s profit margin compared to its sales is ordinary, and it appears to have been negatively affected by the two acquisitions in 2019-20. On the other hand, BMY generates copious free cash flow, which has been boosted by the acquisitions.
BMY is quite profitable, with steadily rising EPS since 2013, again boosted by the acquisitions in 2019-20.
Not surprisingly, BMY’s debt went significantly higher in conjunction with the recent acquisitions. Management has indicated its intention to bring debt back to lower levels. Historically, BMY did not rely much on debt until 2019.
S&P assigns BMY a credit rating of A+, which suggests that over the long term, debt will not be a problem for the company.
BMY had a slow share-retirement program for several years prior to the acquisitions in 2019-20. It issued shares to help fund the acquisitions. Whether it will return to steadily lowering its share count through buyback programs remains to be seen.
Here is a summary of BMY’s financials.
I don’t give BMY the highest financial grade possible, mostly based on the financial impact of the two major acquisitions (higher debt and the issuance of shares). That said, BMY has a good financial record, and as the acquisitions are absorbed and integrated, it appears that they will turn out to have been very good moves.
I use four models in valuing companies, then average the results. See Dividend Growth Investing Lesson 11: Valuation.
Models #1 and #2: FASTGraphs relative P/Es
The first two models use FASTGraphs. Model #1 is a basic estimate of the stock’s fair value based on a general market history, while Model #2 “normalizes” #1 by using the stock’s own past 5-year average valuation rather than the market’s.
The magenta line is Model #1, a fair-value reference line based on the Health Care sector’s P/E ratio of 21. The blue line is Model #2, based on BMY’s own average 5-year P/E of 16.9. Both models suggest that BMY is quite undervalued. BMY’s current P/E ratio is 9.8.
The black line is BMY’s actual price. An interesting thing about the price line is that it has basically stayed flat straight through the two major acquisitions. I’m not sure why that is. Major acquisitions usually change investor perceptions. Perhaps the additional shares sold by BMY offset the significant increase in the size of the company, keeping the relative value of each share roughly the same in the eyes of investors.
For all of the models, I compute valuation ratios that reduce each model to a ratio of actual price to fair price. Here is the formula for the first two models:
Valuation Ratio for FASTGraphs = Current P/E divided by Reference P/E
Here are the valuation ratios for BMY:
- Model 1: Based on basic (magenta) line: 9.8 / 21.0 = 0.47
- Model 2: Based on historical (blue) line: 9.8 / 16.9 = 0.58
Both models yield extreme results. So in both cases, I will put a floor under the valuation ratio by using 0.80. I use this technique (of putting a floor or cap on a model) when its result seems to be an extreme outlier. That keeps it in the right direction, but it prevents the extreme numerical value from distorting the overall valuation conclusion.
Model #3: Morningstar DCF Valuation. Morningstar uses a discounted cash flow (DCF) model for valuation. The idea behind DCF has been summarized by Warren Buffett:
Intrinsic value can be defined simply: It is the discounted value of the cash that can be taken out of a business during its remaining life. The calculation of intrinsic value, though, is not so simple…. [It] is an estimate rather than a precise figure. (Source)
Morningstar makes what I believe are conservative, logical estimates and performs the necessary calculations. Just as I did with the first two models, Morningstar converts their result into a valuation ratio, which is circled below.
Morningstar’s valuation ratio is 1.01, suggesting that they see BMY as almost exactly fairly valued.
Model #4: Current Yield vs. Historical Yield. The last model compares the stock’s current yield to its historical yield. The idea is that if a stock’s yield is higher than normal, it suggests that its price is undervalued (and vice-versa).
When rounded to one decimal place, BMY’s current yield of 2.9% is the same as its 5-year average of 2.9%.
Valuation Ratio for Relative Yield = 5-Year Yield divided by Current Yield
The valuation ratio in this case is 2.9% / 2.9% = 1.00, meaning fairly valued.
Valuation summary. This table summarizes the four models:
Simply taking the average of the four leaves us with a valuation ratio of 0.90. I use a 10% range above and below fair value to define my fair-price range, so (mindful of the fact that I put floors under the first two models), I consider BMY to be undervalued at this time.
BMY’s recent price is $69. Its calculated fair price is therefore $69 / 0.90 = $77.
Here is my price and yield grid for BMY, using the +/- 10% concept to define a fair range:
At around $69 for its current price, I see BMY as selling at a discount right now.
Many brokerage accounts provide free stock analyses from various data providers.
My Dividend Growth Portfolio is held at E-Trade, and they display this summary of analyst recommendations for BMY:
These are almost all positive recommendations. I consider this to be a positive factor.
The Bottom Line on Bristol-Myers Squibb
- Mid-yield, mid-growth stock with safe dividend. Recent dividend increases have been growing, with most recent at 8.9%. Safe dividend-safety grade of 79.
- Excellent business model with sustainable competitive advantages. High quality ratings from third-party providers.
- Good financials, with excellent cashflow. Management has indicated intent to reduce debt associated with recent major acquisitions.
- Seems to be successfully absorbing acquisitions, which have broadened company’s scope and product lines.
- About 10% undervalued.
- Recent significant increases in debt and shares outstanding related to major acquisitions. Management has stated intent to reduce debt.
Conclusion: In my opinion, BMY is a fine candidate for dividend-growth investors who are looking for a strong, stable company that offers dividend safety, and who do not insist on high yields. Years of flat price may be a “coiled spring” in relation to company’s true value.
This is not a recommendation to buy, hold, sell, trim, or add to BMY. Any investment requires your own due diligence. Always be sure to match your stock picks to your personal financial goals.
Recent Articles on BMY
What’s a Better Buy? Bristol-Myers (BMY) vs. Amgen (AMGN) (Jason Fieber, June 2021)
Undervalued Dividend Growth Stock of the Week (Jason Fieber, June 2021)
High Quality Dividend Growth Stock for December: Bristol-Myers Squibb (BMY) (Dave Van Knapp, December 2020)
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