Is Bristol Myers’ dividend in jeopardy?

Bristol Myers Squibb (NYSE: BMY) pays investors an attractive dividend that offers an incredibly high rate of 5.5%. Close four times THE S&P 500 average of 1.4%. At such a high rate, investing about $18,200 would be enough to generate $1,000 in annual stock dividends.

However, as is the case with many high-yielding stocks, the Bristol Myers dividend comes with some risk. The company’s growth has been a concern for investors, and recently, its financials haven’t been so good. Below, I will discuss the safety of the dividend and whether investors can rely on it.

The company recently made a big loss

On April 25, Bristol Myers reported its latest quarterly figures. While the top line was decent — the health care company’s revenue rose 5% year over year to $11.9 billion — the bottom line was problematic.

The company suffered a loss that looked a lot like its revenue, except it was negative. At $11.9 billion, Bristol Myers’ loss was primarily the result of ongoing research and development expenses stemming from the acquisition of Karuna Therapeutics and the collaboration with SystImmune.

But even if you exclude these non-recurring charges, the company’s pretax earnings would still have totaled $1.4 billion — down significantly from $2.8 billion a year ago. Rising costs and bottom line growth are a problem for Bristol Myers, as many of the drugmaker’s top drugs, including Eliquis, Revlimid and Opdivo, are likely to see their revenue decline due to increased competition.

Does Bristol Myers generate enough profit to support its dividend?

Bristol Myers currently pays $0.60 per share in quarterly dividends. To comfortably support its payout, it would need to generate earnings per share (EPS) of more than $2.40. This year, the company expects its diluted EPS to be just $0.40 to $0.70. But without the impact of recent acquisitions, its EPS figure would be much higher — at least $7.10.

Acquisitions can often hinder a company’s bottom line, but they are not persistent, long-term problems. Thus, Bristol Myers’ low orientation may not be so alarming. In the long run, acquiring healthcare companies can enhance their growth prospects and ultimately end up strengthening their financial position.

Another way to assess dividend safety is to look at the company’s free cash flow (FCF). Last quarter, Bristol Myers paid out $1.2 billion in cash dividends. Its free cash flow during that period totaled $2.6 billion, leaving room for the business not only to pay its dividends, but also to invest in its growth and pay down its long-term debt, which totals just under 50 billion dollars.

The story continues

The company has had no trouble recently generating enough free cash to support its dividend. The following chart shows its quarterly free cash flow less its dividend payments, which have often been more than $1 billion.

Should you invest in Bristol Myers shares?

Bristol Myers’ dividend looks safe despite what might have looked like a worrisome first-quarter result. Investors should not expect a dividend cut in the near future.

In the long term, there is a greater risk. The company’s debt may be a concern as it is a price Bristol Myers must pay to strengthen its pipeline and asset portfolio. Depending on how well the company can grow in the future and pay off its debt, I wouldn’t rule out the possibility that the company could reduce its payments to improve its balance sheet. But it’s probably not at that stage now.

Bristol Myers can be a good dividend stock to own, provided you take some risk. The stock is trading at multi-year lows and could prove to be a cheap buy.

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David Jagielski has no position in any of the listed stocks. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.

Is Bristol Myers’ dividend in jeopardy? was originally published by The Motley Fool