In this article, I discuss one of my favorite biotech companies, Amgen (AMGN), and why I think it can offer investors a win-win scenario. Based on the company's past successes, along with its future prospects, this stock should certainly be considered — especially for those who plan to hang on for the long haul.
Can Amgen Support a Strong and Ongoing Dividend Payment?
Amgen is in the business of discovering, developing, manufacturing, and delivering innovative human therapeutics. Over time, the company has had very strong products. This has helped in growing the stock price. But the shares have also given investors to purchase based on Amgen's reputation for regularly returning capital to its shareholders.
As far as revenues, Amgen inched up slightly above estimates for the quarter ended December 31, 2011, although it missed its expectations on earnings per share. Analysts had predicted revenue of $3.92 billion with actual revenue coming in at $3.97 billion. This equates to a nearly 3.5 percent gain over the prior quarter's revenue of $3.84 billion.
With regard to Amgen's non-GAAP earnings per share, the company came in at just over $1.20 — which was right on target with estimates. The GAAP earnings per share of $1.08, though, was just slightly higher than last year's same quarter of $1.08 per share.
However, in comparison to some of Amgen's biggest competitors, the company is still extremely well placed having a five-year P/E-to-growth ratio of over 1.4 times. This means that Amgen stands at 31 percent and 23 percent lower than Johnson & Johnson (JNJ) and Sanofi (SNY), respectively. Johnson & Johnson currently pays a dividend of $2.28, for a yield of 3.50%, while Sanofi currently pays a dividend of $1.76, for a yield of 4.70%. We will see how this compares to Amgen's dividend below.
Looking at Future Estimates
In looking ahead, 2012's earnings per share estimate stands at $6.02, while Amgen's estimated revenue is just over $16 billion. This is just one of the areas that has moved analysts to rate Amgen as Outperform.
For the first quarter of 2012, Amgen plans to pay a dividend of $0.36 per share. This is an increase of roughly 29 percent over the dividend payout for two previous quarters. In fact, Amgen plans to return over 60 percent of its net income to its shareholders throughout 2012.
At present, Amgen's dividend yield is standing at 2.2 percent. This puts the yield slightly above the overall S&P 500 of 2 percent. Regarding the company's dividend payout ratio — which is really what investors need to consider — Amgen has what is considered to be a somewhat modest 14 percent. This is actually good news, though, as ratios that are seemingly too high could be an indication that the company could be stretching to make dividend payments that it really cannot afford to make.
In order to support its dividend payment, Amgen has had a fairly impressive earnings per share annual growth rate of approximately 10 percent over the past five years. This is good because earnings growth is what is essential in order to support not just the payment of dividends, but to comfortably support a growing dividend amount.
One of the primary things that income investors will need to consider, however, when determining their share purchase is that Amgen — although strong in a number of areas — does not have a long history of dividend payments.
Yet, by being somewhat cautious, the company possesses a modest dividend yield and payout ratio, along with a reasonable amount of debt, I think that the company is in an extremely strong position. Adding to that the company's growth and you could have quite a winner here.
Currently, Amgen is trading just over $67 per share, which is very close to its 52 week high price of $70 and far ahead of the 52-week low of just over $47 per share. And, although the one year estimated target price is just under $71 per share, I feel that the stock has enough momentum and positive news surrounding it to surpass that number — possibly even by mid-year.
Why Amgen Could Be a Winner?
If still not convinced that Amgen could be a next win-win scenario, I encourage investors to consider the following:
- Yield. Here again, with a seemingly not-so-impressive yield of just over 2 percent, Amgen seems to be playing it safe. This also signifies the company's growing share price.
- Balance Sheet. Although Amgen's debt-to-equity ratio is over 100 percent, the company's interest coverage rate stands at 9 times, giving Amgen a comfortable amount of cash to work with regarding their obligations.
- Dividend Payout Ratio. Although it is likely to be better over time, Amgen's payout ratio is currently a nice 14 percent. Here again, the company is showing that it has the ability, yet also the restraint for not moving too quickly to commit to something it may not be able to support.
- Growth. Here is where Amgen really shines. Over the past five years, the company's earnings per share have grown at a rate of 10 percent. Very impressive.
Based on the points above, I would definitely lean towards being a buyer of Amgen shares — even given their short history of dividend payments. The company appears to have all of the right fundamentals in place to continue not just paying a dividend, but for growing it on a continuous basis. Therefore, over time, I feel that investors will benefit in both the income and growth areas with this stock.
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