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A Fast-Growing 3.2% Yielding Blue-Chip With 300% Total Return Potential In The Coming Years

A Fast-Growing 3.2% Yielding Blue-Chip With 300% Total Return Potential In The Coming Years

Posted On June 12, 2020 4:24 am
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Bristol-Myers (BMY) is one of the Dividend Kings’ highest conviction blue-chip buy ideas right now.

Bullish Thesis

This pharma giant has been accelerating profit growth in recent years due to its increasing focus on specialty-drugs, specifically high-margin oncology and cardiovascular drugs.

The Celgene acquisition, which closed in late 2019, was so immediately accretive to EPS that this year management is guiding for about 30% EPS growth while analysts expect even stronger earnings growth in the coming years.

  • 2020 EPS growth consensus: +32%
  • 2021 EPS consensus: +19%
  • 2022 EPS consensus: +7%
  • 5-year growth consensus: 17.9% CAGR

Risks To Consider

Bristol is increasing its focus on branded drugs by selling off unrelated business lines, which elevates its exposure to patent losses. Further, the increased branded drug focus raises the company’s dependence on its pipeline.

This will result in higher sales volatility than observed at its more diversified peers. Additionally, the company is exposed to risks facing the entire pharmaceutical group, including generic threats, decreasing pricing power owing to managed-care constraints, and product liability cases.

From a product-specific standpoint, we believe the company’s largest pipeline risk surrounds its immunotherapy drugs, which could develop into major blockbusters or fail in the market, depending on clinical data.

Further, the risk of competitors such as Merck and Roche taking more market share in immunotherapy is rising as other companies are catching up, particularly in combination therapy.

Lastly, the recent move to acquire Celgene adds financial risk due to the large amount of debt needed to finance the deal. Overall, we view the company’s uncertainty as medium.” – Damien Conover, Morningstar

Valuation/Total Return Potential

  • 2020 average historical fair value (7 metrics): $92
  • Current price: $56.71 (38% discount to fair value)
  • Dividend Kings Rating: potentially very strong buy
  • Yield: 3.2%
  • Dividend Safety: 4/5 above-average
  • Quality: 9/11 Blue-Chip

 

Safety Score Out of 5 Approximate Dividend Cut Risk (Average Recession) Approximate Dividend Cut Risk This Recession
1 (unsafe) over 4% over 24%
2 (below average) over 2% over 12%
3 (average) 2% 8% to 12%
4 (above-average) 1% 4% to 6%
5 (very safe) 0.5% 2% to 3%
  • Historical market-determined fair value: 18 to 20 PE
  • Current forward PE: 9.1
  • Analyst Consensus long-Term growth Range (including the historical margin of error): 7% to 22%
  • 5-year consensus total return potential: 28% CAGR
  • 2022 consensus return potential: 48% CAGR
  • 5-year mid-range probability-weighted expected return: 20% CAGR

 

BMY 2025 Consensus Return Potential 

(Source: F.A.S.T Graphs, FactSet Research)

2022 Consensus Return Potential 

(Source: F.A.S.T Graphs, FactSet Research)

Now compare this return potential against the highly overvalued S&P 500.

S&P 2025 Consensus Return Potential 

(Source: F.A.S.T Graphs, FactSet Research)

S&P 500 2022 Consensus Return Potential

(Source: F.A.S.T Graphs, FactSet Research)

Compared to the S&P 500 Bristol-Myers at a 35% discount to historical market-determined fair value

 

BMY Investment Decision Matrix 

Goal BMY Why Score (Out of 5)
Preservation Of Capital Excellent 0.6% long-term bankruptcy risk (A+ credit rating) 5
Return Of Capital Average 27% of capital returned over the next 5 year via dividends vs 12% S&P 500 3
Return On Capital Excellent 20% PWR vs 1% S&P 500 5
Relative Investment Score 87/100
Letter Grade B+
S&P 73/100 = C

(Source: Dividend Kings Investment Decision Tool)

Compared to the S&P 500 BMY is a far superior choice for anyone looking for superior yield, strong long-term earnings growth, and overall total return potential.

About author

Dividend Sensei
Dividend Sensei

I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.

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