Does Bristol Myers Squibb Co. (BMY)’s Dividend Have Room to Soar?

Published on March 18, 2013 at 9:20 am by The Motley Fool in News

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Valuation
Not all dividends are created equal. At first glance a high dividend yield may look nice, but all too often it means a problem is lurking around the corner for a business. Looking at Bristol-Myers’ 3.7% dividend yield in isolation only tells half of the story, which is why investors need to have an understanding of how the market perceives a company prior to buying a stock. We can do this by comparing a few financial multiples, like price to earnings, to its peers in the industry.

Future growth
Up to this point, we’ve looked at Bristol Myers Squibb Co. (NYSE:BMY)’ dividend in the past, and we’ve also seen how its stock is being perceived by the market today. However, the most important factor to consider when understanding a dividend’s future is where the company’s cash flow is heading. It’s hard to generate more cash without growing sales, so let’s take a look at what industry analysts are expecting for Bristol-Myers’ revenue growth relative to peers this year.

Foolish bottom line
While many big pharma companies saw their payout ratios increase last year, Bristol Myers Squibb Co. (NYSE:BMY)’ dropped meaningfully from 50% to around 35%. On its own, that suggests capacity to increase the dividend, but don’t be fooled — Bristol-Myers is unlikely to see a big boost in its dividend any time soon.

Last year’s fall in payout ratio is due to a big $3.5 billion payment the company received from AstraZeneca plc (ADR) (NYSE:AZN) for a new diabetes partnership. Adjusting for that one-time payment better reflects Bristol’s core business, and its payout ratio looks closer to 80%. This dividend isn’t soaring any time soon.

The article Does Bristol-Myers’ Dividend Have Room to Soar? originally appeared on Fool.com.

Brenton Flynn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.