A cornerstone of dividend growth investing is to stay focused on buying quality assets and ignoring the noise surrounding uncontrollable parts of the economy. I have employed this measure and look for decent opportunities whether the stock market is up or down. My only focus is to increase my dividends year after year and try not to time the market in order to attempt outperformance. While there are some good value finds in sectors such as energy, commodities and financials, one sector that has shrunk in my portfolio is healthcare. I decided to put some cash to work in this sector as I am confident that it will do well over the course of years to come.
Healthcare is the one sector seeing robust inflation while the rest of the economy faces either headwinds or stagnation. I recently closed my position in Medtronic plc (MDT), which shrunk my healthcare exposure, with only Amgen Inc (AMGN) and Johnson & Johnson (JNJ) making up my healthcare sector. I decided to put some cash to work in one of the largest biotech firms in the industry.
I added to my position in Amgen Inc (AMGN) with 10 shares @ $160.00. The company yields 1.98% adding $31.60 to my annual dividend income. My original position was initiated in Feb 2015 – see the post here.
From Yahoo! Finance:
Amgen Inc., a biotechnology company, discovers, develops, manufactures, and delivers human therapeutics worldwide. It focuses for the treatment of illness in the areas of oncology, hematology, inflammation, bone health, nephrology, cardiovascular, and general medicine. The companys principal products include Neulasta, a pegylated protein to decrease the incidence of infection associated with chemotherapy-induced febrile neutropenia in cancer patients; NEUPOGEN, a recombinant-methionyl human granulocyte colony-stimulating factor for reducing the incidence of infection as manifested by febrile neutropenia for patients with non-myeloid malignancies; and Enbrel to treat rheumatoid arthritis, plaque psoriasis, and psoriatic arthritis in adult patients. Its principal products also comprise EPOGEN for the treatment of dialysis; Aranesp for treating anemia; XGEVA for the prevention of skeletal-related events; Prolia to treat postmenopausal women with osteoporosis; and Sensipar/Mimpara products for use in the treatment of secondary hyperparathyroidism in chronic kidney disease patients on dialysis. The companys other marketed products include Kyprolis, a proteasome inhibitor to treat patients with multiple myeloma and small-cell lung cancer; Nplate, a thrombopoietic compound; Vectibix, a human monoclonal antibody; and BLINCYTO for the treatment of patients with Philadelphia chromosome-negative relapsed or refractory B-cell precursor acute lymphoblastic leukemia. It also develops various products that are in various clinical trials. The company serves pharmaceutical wholesale distributors; and healthcare providers, including physicians or their clinics, dialysis centers, hospitals, and pharmacies, as well as consumers. It has collaborative agreements with AstraZeneca Plc; Takeda Pharmaceutical Company Limited; UCB; and Bayer HealthCare Pharmaceuticals Inc. The company was founded in 1980 and is headquartered in Thousand Oaks, California.
Biotech is seldom well understood unless you are an expert in the field (either as an investor or working/studying in the field) and with the confusing names in the drug world, it is hard to differentiate between the various offerings and comparing competitors. The following chart from Amgen gives a quick overview of their best sellers and the target market.
(Source: Amgen’s presentation at Jefferies healthcare conference)
The financials are solid. The top-line revenue has continued to grow year over year for the last decade. EPS have also increased through the years except for 2006 and 2011, where the EPS stumbled a bit. EPS growth over the past five years was 8.2% and analyst expect EPS to grow by 11% over the next five years (the PEG ratio is 1.96). The debt level is manageable at 1.14 debt/equity. The current price is not cheap, with a P/E of 21.5, but with the earnings to be high, the forward P/E is a lowly 15.4. P/B is a bit high for my taste at 4.7, but a high growth industry such as biotech is usually trading at high multiples.
Amgen topped $20B for the first time in annual sales in 2014. The company is guiding $20.9-$21.3B in 2015, with EPS of $9.35-$9.65. The company’s revenue is very US-centric currently (with 76.7% of its revenue coming from US, according to the 2014 annual report), but the company expects a 24% Compound Annual Growth Rate (CAGR) in international markets leading upto 2018.
Amgen pays $3.16 in annual dividends. The company started paying dividends in 2011 and right out of gate have started raising them. Amgen is a Dividend Challenger, having raised dividends for 5 consecutive years and its 3-yr dividend growth rate (DGR) stands at 63.3%. The last dividend increase announcement came in Oct 2014 when it raised the dividend by 30%. In addition, the company has indicated that it is targeting a dividend increase of another 30% in 2015! The current payout ratio is a low 34.9%.
Recent Buy Decision
- Healthcare is the one sector seeing robust inflation. If we see a major correction in the near future, healthcare might come out unscathed. However, it is possible there will be a significant correction in the healthcare sector as well and I will be looking to average down the cost basis, if an opportunity presents itself.
- The financials are great with decent P/E (21.5), great forward P/E (15.4), PEG (1.96), great 5-yr EPS growth rate (8.2%) and expectations (11.2%).
- Revenue geographical diversification is expected to improve. According to the 2014 annual report, the company generates 76.7% of its revenue in the US, but the international operations and revenue is expected to grow aggressively over the years – with Amgen guiding a 24% CAGR in international growth leading upto 2018.
- Amgen raised its bottom end of revenue guidance and raised its earnings guidance during the Q1 2015 earnings release statement. In addition, the balance sheet and cash flow statements are improving substantially, with better cash flow, lower capex, reduced debt etc.
- A spectacular dividend growth (63% 3-yr DGR), which is expected to continue as per the management outlook and guidance (guidance is for another 30% increase in dividends in 2015).
- Amgen’s pipeline is flush and is on the cusp of a spectacular new product cycle. While its not just a near term investment, it is also interesting to see that there are plenty of drugs in the pipeline for 2016 and 2017. The following chart from the J.P. Morgan Healthcare Conference presentation gives a summary of the pipeline milestones in 2015.
(Source: Amgen’s presentation at J.P.Morgan Healthcare conference)
- Stock valuation is a bit high including the overall market. The market is probably primed for a correction in the coming months.
- Failure of FDA approval could result in lost time in research and potential revenue/earnings loss.
- While biotech firms have patents protecting them against competition, other companies can develop biosimilars, which are officially approved versions of similar drugs. Recently Amgen demonstrated a biosimilar to Humira moving in on AbbVie’s (ABBV) top seller. While this is great news for AMGN, other competitors can use a similar strategy for AMGN drugs.
Amgen is one of the largest biopharma company in the world with a market cap of $121B. The company is at the forefront of innovation with plenty of new drugs in the pipeline and recently topped $20B in annual sales. The company is a dividend grower with a five year streak and due to the nature of the business, operates in a resilient/recession-proof sector. While the valuation to initiate now is debatable, I have decided to add to my position anyway and will add more if the stock continues to provide better opportunity in the future.
Summary of Amgen Inc:
- Symbol: AMGN
- Quote: $160.00
- 52-week range: $108.20 – $173.14
- P/E: 21.5
- Forward P/E: 15.4
- P/B: 4.7
- Debt-to-Equity: 1.14
- Yield: 1.98%
- Payout ratio: 34.9%
- 3-yr DGR: 63.3%
- The 2015 Q1 quarterly earnings report
- Presentations from Amgen at various conferences
- A Comprehensive Look At Amgen’s Competition Against Its Top Products
Full Disclosure: Long AMGN, JNJ. My full list of holdings can be found here.