Dividend stocks are hard to come by in the biotech space. There are plenty of pharmas that offer dividends, but finding a biotech stock that offers a dividend is a bit challenging.
The one and only
In fact, there’s really only one biotech dividend stock: Amgen, Inc. (NASDAQ:AMGN). The company started offering a dividend in 2011, so it doesn’t exactly have a long history of offering a dividend. Even so, it seems like Amgen, Inc. (NASDAQ:AMGN) is fully committed to being a dividend stock; it raised its dividend in 2012 and again this year. The dividend now sits at $1.90 per share, 68% higher than where it started in 2011.
At a yield of just 1.9%, you’re not going to be buying Amgen solely for its dividend; it’ll take some capital appreciation to justify owning the dividend stock. Still, it’s a nice payout when growth is hard to come by.
Why the other big biotechs aren’t dividend stocks
True confession: I started this article with a plan to argue that the other three big biotechs — Biogen Idec Inc. (NASDAQ:BIIB), Celgene Corporation (NASDAQ:CELG), and Gilead Sciences, Inc. (NASDAQ:GILD) — should also offer a dividend.
Then I made the following chart.
|Company||Free Cash Flow TTM (in millions)||FCF/P|
The second column is essentially what the dividend yield could be if the company spent all of its free cash flow on a dividend. No company would do that, but it shows how little of its free cash flow Amgen, Inc. (NASDAQ:AMGN) is using on its dividend. If the other three wanted to be dividend stocks with yields of 2%, they’d have to dedicate half or more of their free cash flow.
That clearly wouldn’t be a good idea. Companies need that cash to license drugs and make acquisitions to supplement the pipeline; internal R&D can only take companies so far.
Priced for growth
Amgen, Inc. (NASDAQ:AMGN) is different from the other three large biotechs because investors have given up expecting massive growth from the company. Biogen Idec Inc. (NASDAQ:BIIB), Celgene Corporation (NASDAQ:CELG), and Gilead Sciences, Inc. (NASDAQ:GILD) are still being priced like they have substantial growth left. It doesn’t make sense for them to become dividend stocks until investors are pricing them like a slow-growth pharma.
The obvious compromise is for companies to repurchase shares, which give the biotech companies a little more freedom with their free cash flow than dividends that investors would come to expect. If more M&A opportunities arise, companies can cut back on purchases accordingly.
All three have repurchased shares over the last few years. Celgene, for example, recently completed a $2.5 billion stock repurchase and reupped for another $3 billion.
While I’m sure there are a lot of dividend investors that would like to have more options for biotech dividend stocks, at least the companies aren’t hoarding shareholders’ cash.
The article The Only True Biotech Dividend Stock originally appeared on Fool.com and is written by Brian Orelli.
Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends Celgene and Gilead Sciences.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.