The health care sector is often a favorite of the dividend growth investor class for a number of reasons.
First, the sector provides products and services that tend to be in high demand even under recessionary conditions. The state of a person’s health often impacts their quality of life, making seeking care for a aliments highly likely even with an economic downturn is taking place.
Second, the world’s population is growing older at a rapid clip. The number of adults in the U.S. age 65 or older is expected to double by mid-century. By 2040, the expected percentage of people in the country who are at least 65 years old will be more than 20%. This will provide significant tailwinds to the companies in the health care sector, as people often need additional health care services as they grow older, helping companies to see steady and somewhat predictable growth over long periods of time.
Both of these trends should provide additional profits for health care companies and allow for dividend growth. Thus, in this article, we will examine two pharmaceutical companies that recently raised their dividends by at least 10%, far greater than their respective long-term average increases.
Bristol-Myers
Bristol-Myers Squibb Company (BMY, Financial) is involved in the manufacturing of pharmaceuticals, medical products, orthopedic implants and diagnostic systems. Bristol-Myers added Celgene Corporation in late 2019 to augment its existing businesses. The company is valued at $131 billion and generates annual revenues approaching $48 billion.
On Dec. 13, Bristol-Myers announced that it was increasing its dividend by 10.2% for the Feb. 1, 2022 payment date, extending the company’s dividend growth streak to 15 years. The company raised its dividend by a minimal amount for much of the last decade, as evident by the compound annual growth rate (CAGR) of just 3.4% for the dividend during the 2011 to 2020 time period.
However, growth has increased greatly in the near term. The most recent increase marks the company’s third consecutive dividend raise of higher than 8%.
The new annualized dividend of $2.16 results in a forward yield of 3.6%, which is nearly three times the average yield of 1.3% for the S&P 500 Index. This new yield is also superior to the stock’s 10-year average yield of 3.1%, according to Value Line.
Bristol-Myers’ shareholders received $1.96 of dividends per share this year. Wall Street analysts expect that the company will earn $7.50 per share in 2021, implying a projected payout ratio of just 26%. The company is expected to earn $7.80 per share next year, giving the company a projected payout ratio of 28% for 2022. Bristol-Myers has a very uneven payout history with a 10-year average of 77%, which drops to 43% when looking at just the last five years. The current and forward payout ratios are very reasonable and likely provide ample room for Bristol-Myers to continue to grow its dividend at a high rate.
Shares of Bristol-Myers are trading at just over eight times earnings estimates using the most recent closing price of $60.61. The stock’s historical valuation is just as erratic as the average dividend payout ratio, as the price-earnings ratio has an annual average of 13.4 and has been as high as 43.6 over the last decade. Overall, the average price-earnings ratio has been nearly 26 since 2011. I have stated in a prior article that I felt a price-earnings ratio range of 13 to 15 was appropriate for the stock as this would be more in-line with peers.
The GuruFocus Value chart also sees Bristol-Myers as undervalued:
The stock has a GF Value of $72.63, giving Bristol-Myers a price-to-GF-Value ratio of 0.83. The stock would provide a return of nearly 20% if it were to reach the GF Value. Total returns could push into the low 20% range once the dividend yield is factored in. Shares earn a rating of modestly undervalued from GuruFocus.
Eli Lilly
Eli Lilly and Company (LLY, Financial) is a leading developer and manufacturer of pharmaceutical products. The company’s product portfolio addresses the areas of immunology, oncology, diabetes and neuroscience. The $225 billion company has annual revenues of $24.5 billion.
Eli Lilly announced on Dec. 13 that it was hiking its dividend by 15.3% for the March 10, 2022 payment date. The company’s dividend growth streak is now at eight years. The company had maintained its dividend at the same level for some time following the end of the Great Recession.
Dividend growth has come on in a big way over the past few years. The dividend has been raised 14.9%, 14.7% and 14.7% for the 2018 to 2020 period of time. This has helped raise the dividend’s CAGR to 4.7% since 2011.
Eli Lilly has a new annualized dividend of $3.92, giving the stock a forward yield of just 1.4%. This is just barely above the average yield for the market index and less than half of the stock’s 10-year average yield of 3.1%.
Shareholders received $3.40 of dividends per share this year. With analysts expecting $8.02 of earnings per share in 2021, Eli Lilly has a projected payout ratio of 42%. Next year’s estimates call for $8.05 of earnings per share. The new annualized dividend pushes the payout ratio to 49%. Both figures are near or below Eli Lilly’s 10-year average payout ratio of 51%.
The reason that Eli Lilly’s yield is so far below its average is that the stock has had an incredible run, with shares up more than 64% over the last year. This has caused a surge in the valuation, with Eli Lilly now trading at 34 times this year’s earnings estimates. The stock has averaged a price-earnings ratio of 18 since 2011 and 21 since 2016.
The GuruFocus Value chart also shows the stock to be massively overvalued.
Using the recent closing price of $275.28 and the stock’s GF Value of $185.66, Eli Lilly has a price-to-GF-Value ratio of 1.48. Shares would have to decline almost 33% from current levels to reach the GF Value. GuruFocus rates Eli Lilly as significantly overvalued.
Final thoughts
The health care sector has multiple tailwinds working in its favor, which is why companies in this sector often pay dividends.
Bristol-Myers and Eli Lilly are two companies in the sector that just handed out dividend increases of at least 10%. These raises are far better than what shareholders saw during the last decade. Both payout ratios appear to be healthy, and room remains for future dividend growth.
Of the two names discussed, Bristol-Myers trades below its own long-term valuation and the GF Value, suggesting that shareholders could be in for solid capital gains. Eli Lilly’s gain in price over the last year has put the stock well above its long-term average valuation. The stock also trades at a premium to its GF Value, suggesting that investors interested in the name may want to wait for a pullback.
