The NASDAQ Biotech Index was the #2 performer in January. Biotechs tend to move on the merits of their drug developments, meaning that they are not as economically sensitive as other sectors. Sure, they can rise and fall with the market, but economic cyclicality seldom affects their profit and loss statements.
Normally, biotech doesn’t offer investors much income, but lately we have seen some nice surprises on the dividend front from large-cap biotechs. Some biotech companies have matured and gotten more profitable, allowing management to increase dividends to market levels in some cases. About 15 years ago a biotech with a good divided sounded like a complete oxymoron, but that is no longer the case.
Of the top three holdings of the iShares Nasdaq Biotechnology (IBB) ETF, only Amgen (AMGN) stock pays a divided, currently around 1.6%. Amgen, the largest biotechnology company by revenues and one of the most mature, has only been paying a dividend since 2011, but it has rapidly hiked the rate from 28 cents per quarter to the current 47 cents.
For dividend growth, Amgen rates an A+, even though I do not expect the dividend to go on growing as expeditiously in the future as it has in the past two years. Still, with a payout ratio of only 28%, Amgen’s dividend can grow substantially from here.
Amgen has $22.5 billion in cash and $27.2 billion in total debt. Why would a cash-rich company elect to carry so much debt on its balance sheet? One reason is to pay a dividend, while earning investment grade credit and maintaining financial flexibility, if the need arises, for takeovers or other corporate purposes.
Amgen was the first biotech to introduce blockbuster drugs that help the body cope with the effects of chemotherapy by inducing the production of red blood cells (Epogen) and by inducing bone marrow to increase production of neutrophils (Neupogen). The company has broadened its product portfolio quite a bit after those early successes, making it more stable than the average biotech one-drug wonder.
For instance, Amgen has a late-stage anti-cholesterol drug that works differently from statins like Lipitor. It has been proven effective in cases where Lipitor cannot help. It may turn out to be quite a blockbuster.