Bristol Myers Squibb (NYSE: BMY) pays investors an attractive dividend, which yields an incredibly high rate of 5.5%. That's nearly four times the S&P 500 average of 1.4%. At such a high rate, investing approximately $18,200 would be enough to generate $1,000 in annual dividends from the stock.
However, as is the case with many high-yielding stocks, Bristol Myers' dividend comes with some risk. The company's growth has been a concern for investors, and recently, its financials haven't been all that great. Below, I'll look at the dividend's safety and whether investors can rely on it.
The company recently posted a big loss
On April 25, Bristol Myers reported its most recent quarterly numbers. While its top line was decent -- the healthcare company's revenue grew by 5% year over year to $11.9 billion -- the bottom line was problematic.
The company incurred a loss that looked much like its revenue, except it was negative. At $11.9 billion, Bristol Myers' loss was primarily a result of acquired in-process research and development charges stemming from its acquisition of Karuna Therapeutics and a collaboration with SystImmune.
But even if you exclude those nonrecurring charges, the company's pre-tax earnings would still have totaled $1.4 billion -- down significantly from $2.8 billion a year ago. Rising costs and minimal growth pose 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 rising competition.
Is Bristol Myers generating enough profit to support its dividend?
Bristol Myers is currently paying $0.60 per share in quarterly dividends. To comfortably support its payout, it should be generating earnings per share (EPS) of more than $2.40. This year, the company is projecting its diluted EPS to be around 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 hamper a company's results, but they're not persistent, long-term issues. Thus, Bristol Myers' low guidance may not be all that alarming. In the long run, acquiring healthcare companies can bolster its growth prospects and ultimately end up strengthening its financials.
Another way to assess the safety of the dividend is by looking 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 to not only pay its dividend, but also invest in its growth and pay down its long-term debt, which totals just under $50 billion.
The company hasn't had problems recently generating enough free cash to support its dividend. The following chart shows its quarterly free cash flow less its dividend payments, which has often been more than $1 billion.
Fundamental Chart data by YCharts.
Should you invest in Bristol Myers stock?
Bristol Myers' dividend looks safe, despite what may have looked like a troubling first-quarter result. Investors shouldn't expect a dividend cut in the near future.
In the long run, there's a bit more risk. The company's debt load may be a concern as it's a price Bristol Myers has to pay to strengthen its pipeline and portfolio of assets. Depending on how well the company can grow its business in the future and pay down its debt, I wouldn't rule out the possibility that the company may reduce its payout to improve its balance sheet. But it likely isn't at that stage right now.
Bristol Myers can be a good dividend stock to own, provided that you're OK with taking on some risk. The stock is trading at multiyear lows and could prove to be a bargain buy.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
