A 3% Dividend Yield With Growth in the Pipeline

Investors typically buy pharmaceutical stocks for growth, but in some cases Big Pharma can provide value as well as income. Large-cap pharmaceutical stocks that have reached sufficient size and consistent profitability can generate enough cash flow to invest heavily in growth, but also return cash to shareholders. Amgen Inc. is an example of a Big Pharma stock that offers plenty of growth, with the added bonus of a hefty dividend. Amgen stock currently yields 2.8%, and increases the dividend on a regular basis including a 10% increase in December 2019. With four consecutive flat quarterly dividends, Amgen could be on the verge of another hefty dividend raise. Amgen stock is also reasonably valued, with a fairly low price-to-earnings ratio. The combination of growth potential, dividends, and a low valuation make Amgen an appealing stock for value and dividend growth investors. Strong Results in a Weak Climate Amgen is the largest independent biotech company in the world. The company discovers, develops, manufactures and sells medicines that treat serious illnesses. It focuses on six therapeutic areas: cardiovascular disease, oncology, bone health, neuroscience, nephrology, and inflammation. Amgen is a large-cap stock with a market capitalization of $132 billion. Amgen has performed very well, especially considering the difficult operating climate over the course of 2020. Despite the coronavirus pandemic, which has suppressed economic growth, the company continues to generate double-digit growth. Amgen announced earnings results for the third quarter on Oct. 28. Revenue increased 12% to $6.4 billion, while adjusted earnings per share advanced 19.4% to $4.37. Revenue and EPS both beat consensus estimates. The company had volume growth of 18%, which was partially offset by lower net selling prices. Sales for Enbrel, which treats rheumatoid arthritis and remains Amgen's top grossing product, were down 3%. Enbrel lost market share in the quarter and was also impacted by lower growth in the rheumatology sector as a whole due to Covid-19. Offsetting this decline was osteoporosis therapy Prolia, which grew sales by 11%, due mostly to volumes gains. The company also revised its guidance for the year, by narrowing its revenue forecast but raising its earnings forecast. Amgen expects revenue of $25.1 billion to $25.5 billion, from $25 billion to $25.6 billion previously. Adjusted EPS is now expected in a range of $15.80 to $16.15 for 2020, up from $15.10 to $15.75 previously. As the global economy continues to recover, we expect Amgen to directly benefit. For example, Prolia is now Amgen's second-highest selling product, yet osteoporosis diagnoses in the U.S. are only at ~70% of pre-Covid-19 levels. Therefore, 2020 is expected to be another highly profitable year for Amgen, with continued growth likely in 2021. This will allow it to continue increasing shareholder dividends. Competitive Advantages Provide Dividend Safety The major risk for any pharmaceutical company is loss of patent expiration on key drugs. Amgen is currently experiencing this with Enbrel. Another important product, Neulasta, is also seeing escalating biosimilar competition. However, Amgen has long-prepared for this by investing heavily in its own internal growth, as well as externally through acquisitions. Amgen's competitive advantages include its strong pharmaceutical assets as well as its robust pipeline. Amgen spent 18.1% of 2019 sales on research and development. As a result, it has a well-stocked pipeline to fuel its future growth. The company has also demonstrated resilience during recessions, as people will seek treatment for their health issues regardless of economic conditions. The company also has a very low payout ratio of 40% expected for 2020, which will allow it to continue to raise its dividend going forward, even in a prolonged recession. We expect 9% annual EPS growth over the next five years for Amgen to be achieved through a combination of rising revenue and share repurchases. Amgen repurchased 3 million shares at an average price of $251 during the quarter and has $4.2 billion remaining on its share repurchase authorization. While Amgen is struggling with falling sales for legacy products such as Neulasta and Enbrel, new products are generating growth for Amgen. For example, Repatha, which is used to control cholesterol, grew sales by 22% in large part to a 60% increase in volumes. Separately, Otezla, which is used to treat inflammatory diseases, generated 11% year-over-year sales growth. Amgen: An Attractive Value and Income Stock Based on management's outlook for 2020, shares of Amgen trade for a price-to-earnings ratio of 14.3. A P/E ratio below 15 is a reasonable valuation to pay for a high-quality company with a leadership position in the pharmaceutical industry, as well as one that is growing at such a high rate. Therefore, potential investors should not consider the stock to be overvalued by any means. Even if the stock holds a flat P/E multiple from here, shareholders will likely earn strong returns due to the combination of earnings growth and dividends. Using our expected EPS growth rate of 9% in addition to the 2.8% dividend yield, total returns could exceed 11% per year for Amgen. This is a satisfactory rate of return for an established large-cap, making Amgen an attractive stock for value and income investors looking for an added mix of growth.

A 3% Dividend Yield With Growth in the Pipeline

With four consecutive flat quarterly dividends, this pharmaceutical name could be on the verge of another hefty raise.

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