Recent Buy – Amgen Inc

AMGN-small

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.

Corporate Profile

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 company’s 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 company’s 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.

Specialty

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.

Amgen Focus

(Source: Amgen’s presentation at Jefferies healthcare conference)

Financials

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 Fast Graphs 26/05/2015

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.

Dividends

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%.

AMGN - Dividends

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.

AMGN - 2015 Pipeline Milestones

(Source: Amgen’s presentation at J.P.Morgan Healthcare conference)

Risks

  • 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.

Conclusion

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%

Further Reading:

Full Disclosure: Long AMGN, JNJ. My full list of holdings can be found here.

31 thoughts on “Recent Buy – Amgen Inc

    • Sam,
      GILD is also a great company – I really like the fact that they have started issuing dividends now. Their drug portfolio and pipeline is fantastic. Wouldnt mind adding taht to my portfolio myself.

      R2R

  1. Healthcare related industries do seem like a good long term bet for company and dividend growth. I should probably look into what the TSX has to offer there, although I have a feeling I might be better of looking South.

    Nice buy, and the div yield isn’t bad, especially with that div growth so far! Thanks for sharing.

    • DW,
      Not much of a choice if you want to stay in the Canadian market – the only option is Valeant – which doesnt spend much on R&D and just buys other drug companies and rights, which isnt the worst business plan out there. I havent looked at their financials, so cant comment on it. But for the healthcare sector – I think US or EU companies are the way to go.

      cheers
      R2R

  2. Looks like a pretty solid bet. I’m looking to possibly add one of the biopharma companies look to be a good long term growth play. They’re just so much harder to analyze compared to say a KO and that’s what’s kept me from diving in too deep. Whenever I get a chance to truly look into these companies I’ll probably add one. Thanks for the update.

    • JC,
      I know what you mean…Ive had a really hard time figuring out the details as well – esp with all the confusing drug names and what diseases they target. For the long term, I have no doubt they (the biotech companies) will do well – in fact they might outperform the traditional drug giants.

      Best wishes
      R2R

  3. Congrats on adding Amgen (again), Im jealous, Ive been waiting for the stock to go down a bit but it just wont go down to a price Im more comfortable at, maybe I just need to pull the trigger before it leave me behind. The more I research about Amgen the more I like it… Oh well we’ll see…

    Thanks for sharing R2R and take care!

    • Oh, so many companies Ive missed out waiting for a better price. I have decided over the course of last few months that if I want quality companies, I need to pay up – even if that means a high PE of 20-22. Hopefully, a correction will provide better opportunities for averaging down and in your case – initiating a position.

      Best wishes and happy investing!
      R2R

  4. Great buy R2R, looks like an excellent company to hold for the long term. The impressive dividend growth so far looks pretty good. Definitely need to add that on my watchlist.

    • Thanks Tawcan. The dividend growth has been strong and the management has indicated that this years div inc is going to be 30%. Hopefully they can keep their word on that.

      R2R

  5. R2R,

    Congrats on adding more AMGN to your portfolio. They are definitely committed to paying out dividends as evidenced by that growth in the chart you shared. Thank you for sharing your purchases and congrats on adding more dividend income in a solid healthcare company.

    All the best.

    FD

    • Thanks for stopping by and sharing the thoughts, FD. Healthcare is a sector which I had a huge exposure to, in the past, but had shrunk over the course of last few months. I am hoping build that back up again – its a great sector that has done well lately and will continue doing well.

      Best wishes
      R2R

  6. Great pickup R2R. Can’t go wrong with a giant in the healthcare sector. I must admit, I am not too familiar with this company but I like the analysis you prepared and the thought process used to arrive at your investment decision. I am interested to see what happens with the DGR rate in the short and long term because the current 3 year growth rate is not sustainable. And without a long-term track record of dividend payments, we can’t fall back on management’s dividend history. But, with your analysis and research, it appears they are committed to continuing to grow their dividend.

    Again, great pick up, way to grow the dividend snowball!

    Bert

    • Bert,
      The dividend growth will eventually slow down. Of course the 30% raises cant last too long…once the dividends reach a decent 3%-ish range, I think the raises will drop to a more manageable levels. Still, I think its a great time to invest – as they have a fantastic pipeline and the financials are really strong (current ratio is a neat 5.5). Although there hasnt been any talk of buyouts/mergers, Im sure Amgen will look to buying the smaller biotech firms to solidify/strengthen their portfolio.

      cheers
      R2R

  7. Very nice, R2R! I’m a big fan of this company, I dug in a little bit when I was doing that “newest dividend growers” series. They were on the list in just their fifth year of dividend increases. That fast graph is super appealing and I believe you picked a long term winner!

    • Ryan,
      Sometimes it helps to get in on the early stages of dividend growth. I hope this pays off over the long run – its what Im doing with Apple and Amgen. Both companies are relatively new to dividend growth and have huge cash reserves (plus new cash flowing in regularly) which can fuel future increases.

      Best wishes
      R2R

  8. RoadMap,

    So… that dividend growth rate… haha, wow! Nice purchase and is a very different stock that I normally don’t come across. What is wild is how BIG they are… it’s awesome. Congrats on the purchase and I know you’ll be loving that 30%+ increase coming up!

    -Lanny

    • Those dividends raises are phenomenal – and like I said to Bert – those will probably temper down a bit over the course of the next few years. But for now, the gravy train continues.

      cheers
      R2R

  9. Nice buy! I wouldn’t beat yourself up over P/B in pharma–no one really pays attention to it. The debt load of AMGN worries me a bit, but its forward P/E ratio is great. Good luck!

    • Thanks for stopping by and sharing your thoughts, Professor.

      The debt load is a bit high, but the company also maintains a decent cash position – the current ratio is looking pretty good too.

      R2R

  10. Looks like a decent buy, but honestly I try to avoid biotech and pharmaceuticals. They have to constantly be innovating and constantly be spending tons of money on R&D for every new drug they put out. Plus you have issues such as R&D not actually producing results, the FDA not approving a drug, or a drug getting recalled and the company getting sued. Couple all that with the fact that you have a limited demographic (how many people have XYZ Disease and are paying for this expensive medication), and you get something with too many pitfalls and bumps to be a SWAN holding for me. I’m not saying it’s a good or bad company, just that it’s a sector I stay away from. Like you said, biotech is a sector that is seldom understood. Count me as one of the people who doesn’t understand it. And if I don’t understand it, I stay away from it.

    I do like the health care field, but only really the consumer staples and hospital equipment/services side of it, which is what attracts me to companies like JNJ.

    Sincerely,
    ARB–Angry Retail Banker

    • I agree with you, ARB. Both the tech and biotech (which is also tech, I suppose) have to keep innovating. Even if they stand still, they move backward compared to the rest of the field. However, the potential returns are really good – thats what makes them an attractive investment. I dont understand the ins and outs of the industry myself, but I have approached it from the fact of understanding the demographics of diseases and some aspects of the healthcare industry to make this investment. Hopefully, the risk will pay off.

      Again, JNJ is a fantastic company – cant go wrong with it. I own some shares in JNJ myself.

      cheers
      R2R

  11. I really like this purchase. AMGN is a strong company with legs to run. I ended up with 100 shares last month due to a put that dropped below my strike price. It turned out to be a great move. I have sold several covered calls and netted more money.

    • Nice move, DD. I own a much smaller amount – about 20 shares in total in my portfolio. Like you said, this company has legs to run. I will be looking to add more shares in the future.

      Best
      R2R

Leave a Reply

Your email address will not be published. Required fields are marked *