Last Updated on June 23, 2023 by Prakash Kolli
In my last article for Dividend Power, I discussed how the omicron variant and the fear of lockdowns lowered the market to over 4%. However, the market did not care much about the omicron variant as it closed the year very much near all-time highs at the end of 2021. However, there are still discounted high-quality dividend growth stocks to be had when most stocks are overvalued even after the weak performance in 2022. In today’s article, we will cover a large pharma company and a high-quality dividend growth stock addressing the question is Amgen a good stock to buy?
Amgen was in the Dogs of the Dow 2021. However, the stock performed relatively poorly in 2021 and Amgen is in the Dogs of the Dow 2022 too. The weak performance may be an opportunity for dividend growth investors. However, we must first answer the question is Amgen a good stock to buy?
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Overview of Amgen
Amgen Inc. can be found in the New York Stock Exchange (NYSE) under the ticker symbol AMGN. The pharmaceutical sector has a lot of big companies that pay a growing dividend, and AMGN is one of them. The main driver for investors to invest their hard-earned money into the pharmaceutical sector is the growing and aging global population which will drive demand for medications and healthcare.
Amgen is a global biotechnology company that develops, manufactures, and sells therapeutics. The company was founded in 1980 and today has a ~$132 billion market cap and is a healthcare behemoth that employs more than 24,000 people. Amgen offers treatments for various ailments, including anemia, rheumatoid arthritis, psoriasis, cancer, and osteoporosis. For example, Amgen’s most significant revenue generating product is Enbrel, which made $1,289 million in revenue in 3Q2021 and was responsible for 19.2% of total revenue. Enbrel is a prescription medication used to treat five chronic diseases, including moderate to severe rheumatoid arthritis.
Other major drugs include Neulasta (neutropenia), Enbrel (autoimmune diseases), Prolia (osteoporosis), Xgeva (fracture in cancer patients), Kyprolis (multiple myeloma), Repatha (cholesterol), and Aimovig (migraines).
Amgen Dividend History, Growth, and Yield
Amgen has been down (-6.84%) in the last 12 months as of this writing. The current stock price of $228.90 is a little less than the midpoint of the 52-week range, which is between $198.64 and $276.69 per share. Thus, Amgen’s stock price has been less than flat while the overall market was rising. As an investor, I do not care if the stock price is flat for a few years if the underlying business grows, such as earnings and revenues. That is the case with Amgen, which we will discuss.
We will now look at Amgen’s dividend history, growth, and yield. We will then determine if Amgen is still a good stock to buy at current prices.
Amgen is considered a Dividend Contender, a company that has increased its dividend for more than ten years and up to 24 years straight. In this case, Amgen had increased its dividend for 12 consecutive years. The company started to pay its dividend in 2011. AMGN’s most recent dividend increase was 10.2% last December. In addition, AMGN has a five-year dividend growth rate of 17.1% according to Portfolio Insight*, which is impressive considering how fast inflation increased last year.
An essential point to note is that AMGN continued to pay its dividend during the most challenging period in the last 100 years. Some businesses and industrials were cutting or suspending their dividends payments during the COVID-19 pandemic; Amgen, however, continued to pay out its dividend and increased it. That is very remarkable. This fact alone leads me to believe in the strength of the company and the fact that management is focused and committed to the dividend policy.
The company has an excellent dividend yield of 3.35% as of this writing, which is more than double the current dividend yield of the S&P 500 Index. This dividend yield is a respectable initial yield for income-driven investors. This dividend yield is also really good for investors leaving the bond market looking for higher yields. However, income-driven investors may want a 4.5% yield or higher. AMGN does not meet those criteria right now, but with the current dividend growth, in 8 to 10 years, the yield on cost should be higher than 4.5%.
AMGN’s current dividend yield is higher than its own 5-year average dividend yield of approximately 2.84%. I like to look at this metric because it gives a good idea if a company I am researching is undervalued or overvalued based on the current and 5-year average yield. This point is because price and dividend yield are inversely related. If the price goes higher, then the dividend yield goes lower. Vice versa as well.
Let’s determine if the current dividend is safe? Dividend safety is a critical metric to look at as a dividend growth investor. Sometimes, undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.
To determine if the dividend payments are safe every year, we must analyze two critical metrics. The first one is payout ratio based on earning-per-share (EPS), and then we must look at dividend cash payout based on free cash flow (FCF) per share.
Analysts predict that AMGN will earn an EPS of $16.83 per share for the Fiscal Year (FY) 2021. Analysts are very accurate when estimating AMGN’s future EPS. In addition, the company is expected to pay out $7.04 per share in dividends for the entire year. This value will give us a payout ratio of roughly 41.8% based on EPS. Having a 60% or lower dividend coverage with a dividend yield of over 3.0% gets me very excited. These values will allow the company to continue to grow its dividend at a double-digit rate as has it has been doing the past ten years. In addition, AMGN has a dividend payout ratio of 47.6% on a free cash flow basis. Thus, the dividend is well covered in both EPS and FCF.
As with all investment ideas, there are always risks. The main risk with an investment into Amgen will be the COVID-19 pandemic and the public and governmental effort to mitigate against its spread. This effort will have a material adverse effect on the company’s clinical trials, operations, supply chains, distribution systems, product development, product sales, business, and results of operations. Furthermore, Amgen may suffer from failed clinical trials, inability to obtain regulatory approval, or lawsuits, and other issues.
Amgen’s Revenue and Earnings Growth and Balance Sheet Strength
We will now examine how well Amgen performed and grew its EPS and revenue in the past decade. When valuing a company, these two metrics are at the top of my list to study. Without revenue growth, a company can’t have sustainable EPS growth and continue paying a growing dividend. IF revenue and EPS are not growing over time, then Amgen is probably not a good stock to buy.
Revenue and Earnings Growth
For the past ten years, AMGN’s revenue has been growing satisfactorily at a compound annual growth rate (CAGR) of ~5.6%. Net income likewise has been growing healthily in past ten years at about 7.8% per year.
However, EPS has seen a much better growth rate than revenue and net income. EPS has grown ~13.5% annually for the past ten years, and over the past five-years, EPS has had a CAGR of about 9.3%. The EPS growth rate has gradually slowed down over the past few years. In addition, analysts predict the company will grow EPS at an approximately 6% rate over the next five years.
EPS increased from $14.82 per share in 2019 to $16.60 per share for 2020, a nice increase of 12%. Additionally, analysts expect AMGN to make an EPS of $16.84 per share for the fiscal year 2021, which would be a ~1.5% increase compared to 2020.
The chart below from StockRover* shows a snapshot of the financials over the past few years.
Balance Sheet Strength
Amgen has a solid balance sheet. Currently, Amgen has an S&P credit rating of A-, which is an investment grade rating. However, the company has a debt-to-equity ratio of 4.6, which is high for this industry. But the interest coverage ratio of 6.5X is excellent and allows the company to continue to pay its debt. Thus, the company has a strong balance sheet to overcome significant economic downturns like the COVID-19 pandemic last year.
One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower price-to-earnings (P/E) ratio based on the past 5-year or 10-year average. Furthermore, I like to use the Dividend Discount Model (DDM). I use a DDM analysis because a business is ultimately equal to the sum of the future cash flow that that business can provide.
Let’s first analyze the P/E ratio. AMGN has a P/E ratio of ~13.7X based on FY 2021 EPS of $16.84 per share. The P/E multiple is a little low compared to the past 5-year P/E average of 14X. If AMGN were to revert to a P/E of 14X, we would obtain a price of $235.62 per share.
Now let’s look at the dividend yield. As I mentioned, the dividend yield currently is 3.35%. Looking at AMGN’s own 5-year dividend yield average of 2.84%, there is good upside potential. For example, if Amgen were to return to its dividend yield 5-year average, the price target would be $284.25.
The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 7%. I use a 10% discount rate because of the higher-than-normal current dividend yield. The projected dividend growth rate is lower than its past 5-year average but conservative. This method gives us a fair price target of $276.77 per share.
If we average the three fair price targets of $235.62, $284.25, and $276.77, we obtain a reasonable, fair price of $265.55 per share. This fair value estimate gives Amgen a possible upside of 16.0% from the current price of $228.90 per share.
Conclusion on Is Amgen (AMGN) a Good Stock to Buy?
Amgen is a high-quality company that should meet most investors’ requirements. The company benefits from an aging and growing population. In addition, Amgen has a solid pipeline. The company has a market-beating 3.35% yield and a double-digit long-term dividend growth record. Amgen is a Dividend Contender with more than ten consecutive years of dividend increases, a low payout ratio, and the potential that shares are 16.0% undervalued. In addition, the Chowder Number (CDN) is 21.0%. This is a world-class healthcare corporation that is on sale.
Disclosure: Felix is long AMGN
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My name is Felix Martinez, and I am a Dividend Growth Investor who has invested in dividend growth stocks for the past seven years. I also run a YouTube channel called FiscalVoyage. I have written for SeekingAlpha.com as well as SureDividend.com. I focus on undervalued dividend growth stocks with capital return and dividend income potential. Make sure to follow me on my YouTube Channel. See you there.