Amgen Inc. (NASDAQ:AMGN), the largest of the so-called biotech stocks, is a very fat company with enormous margins and middling growth.
It is the kind of company conservative brokers stick in a client’s portfolio knowing it’s safe. With a 3% yield, it’s almost a bond. Over the last five years, its capital gains of 122% have exceeded those of the NASDAQ, up 99.3%, but not by an enormous amount.
Writers like our James Brumley talk breathlessly about Amgen’s court cases concerning “biosimilars,” drugs that mimic the work of patented medicines but are made in a different way. But AMGN stock can win no matter how the courts rule.
Whether you, as a self-directed investor, want a piece of Amgen depends on your goals. If you want growth, you may want to take a pass. If you want yield, you may want in.
Eyes on the Amgen Dividend
Amgen is due to report its 2016 numbers on Feb. 2, and analysts are expecting the usual roughly 5% growth on both the top-line and bottom line. For the quarter, that means almost $2.1 billion in earnings, $2.78 per share, and revenues of $5.73 billion.
This means Amgen is bringing over 30% of revenue to the net income line, with mid-single-digit growth. Operating margins are approaching 50%, and management has used that money to reduce debt slightly — about 41% of assets are under debt currently.
What you should be looking at is the dividend, which looks ordinary at $1.15 per share, a current 3% yield, but has been growing like gangbusters since it was instituted in 2011 at about 28 cents. If you got in back in 2012, when the stock was at around $70, you’re now getting a yield of 6.6%, a yield covered nearly three times by earnings. For a dividend investor, that’s a home run.
Knowing that AMGN stock management has been hiking the dividend steadily regardless of earnings fluctuations should give you confidence that today’s slim yield could easily be tomorrow’s fat one.
The only question is whether the five-year pattern repeats.
AMGN Stock’s Patent Story
This is where the patent story comes into play.
Drug companies are all about patents, and Amgen is no different. If you have taken Enbrel for arthritis, or a relative has been given Neulasta to treat side effects of cancer chemotherapy, or your mother has taken Prolia to prevent bone fractures, you’re a customer.
But all patented medicines are threatened — or rather, their fat monopoly profits and margins are threatened — by biosimilars, drugs that mimic the action of patented medicines but are different enough to merit a separate patent.
AMGN stock recently got a biosimilar from Regeneron Pharmaceuticals Inc (NASDAQ:REGN) pulled from the market, but it is also in court fighting for a biosimilar to Humira from Abbvie Inc (NASDAQ:ABBV). As Brumley notes, Amgen is also fighting a biosimilar to Neupogen from Novartis AG (ADR) (NYSE:NVS).
If courts rule for biosimilars, the margins on many drugs could be under long-term threat. If courts rule against them, the biosimilar pipelines of many companies, including Amgen, could also be under threat. But take the word threat here with a grain of salt. AMGN stock is playing both sides of the game, and will likely win either way.
The bottom line thus remains the same. You buy Amgen if you believe the dividend can keep growing, making today’s yield fatter tomorrow. You buy Amgen as part of a diversified portfolio, if you want safe exposure to the biotech field.
Then, once you buy it, ignore analyses like this one. Just put it away and leave it alone for five years. You should do OK.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.