Bristol-Myers Squibb (NYSE:BMY) is a large pharmaceutical company with a market cap of $138 billion as of Dec. 20. The company as it stands today was created when Bristol-Myers and Squibb merged on Oct. 4, 1989, and going into 2022, BMY stock is one of the best stocks around. The company’s roots go back much further back to 1887 when William Bristol and John Myers purchased the failing Clinton Pharmaceutical Company for $5,000.
What immediately stands out about Bristol-Myers Squibb is its low valuation. The company’s management has issued guidance for adjusted earnings-per-share of between $7.40 and $7.55 in fiscal 2021. We expect adjusted earnings-per-share of $7.48 for the year. This gives the company a price-to-earnings ratio of just 8.2 using expected fiscal 2021 adjusted earnings-per-share.
The company’s low stock price has also elevated its dividend yield. Bristol-Myers Squibb stock currently yields 3.5%. This is more than double the S&P 500’s dividend yield of 1.3%.
The Market’s Fear About BMY Stock
It’s clear that Bristol-Myers Squibb stock is inexpensive relative to its earnings power and dividends. There’s a reason the market has discounted the company’s stock.
67% of the company’s total revenue has come from just three blockbuster pharmaceutical products through the first nine months of fiscal 2021: Revlimid, Eliquis and Opdivo. Revlimid — which Bristol-Myers Squibb obtained in the big Celgene acquisition from 2019 — will begin to lose patent protection in 2022. Revlimid is the company’s highest revenue product, responsible for 28% of total sales through the first nine months of fiscal 2021.
Revlimid’s upcoming “patent cliff” appears to have scared investors away from Bristol-Myers Squibb, which we believe has created an opportunity for value-minded investors to invest in one of the blue-chip big pharma stocks at a steep discount.
A stock should trade for a low price-to-earnings ratio when it has unfavorable — or negative — growth prospects. That’s not the case with Bristol-Myers Squibb.
A History of Growth
From a historical perspective, the company’s adjusted earnings-per-share have grown at a compound rate of 12.9% per year over the last decade, with much of that growth occurring over the past three years as adjusted earnings-per-share more than doubled from $3.01 in 2017 to $6.44 in 2020.
Looking forward, the company’s growth days appear to be far from over. Bristol-Myers Squibb’s management expects low- to mid-single digit revenue growth from 2020 through 2025. This means the company expects to continue growing its top line through the beginning of the Revlimid patent cliff.
And Bristol-Myers Squibb has the capability to do this because the real long-term growth driver of its business is its research and development capabilities. The company has a long history of creating new pharmaceutical products to replace revenue from aging products and further grow the top and bottom lines.
The company is expecting to generate $45 to $50 billion in free cash flow from 2021 through 2023. This will provide funds for further research and development, dividends, and opportunistic share repurchases.
Between share repurchases and revenue growth in the low to mid-single digits, Bristol-Myers Squibb should be able to compound its adjusted earnings-per-share at somewhere between 3% and 8% per year.
Why BMY Stock Is One of the Best Stocks for 2022
But what makes the company my top choice for 2022 is that this growth will only be a small part of total returns. We believe a conservative fair value price-to-earnings ratio for Bristol-Myers Squibb is 13.5. This is by no means a high price-to-earnings ratio. The S&P 500’s price-to-earnings ratio is 28.7 for comparison. It’s worth noting that Bristol-Myers Squibb traded above a price-to-earnings ratio of 13.5 for much of the last decade, prior to 2020.
If the company returned to a price-to-earnings ratio of 13.5 from its current price-to-earnings ratio of just 7.9, investors would realize gains of around 70%. We believe the stock is that undervalued at current prices.
On top of that, an investment in Bristol-Myers Squibb means locking in a safe 3%+ dividend yield. The company has a low payout ratio of just 29% of expected 2021 adjusted earnings per share, so the dividend is very well covered. And Bristol-Myers Squibb has increased its dividend for 14 consecutive years, so future growth is likely.
While we don’t expect rapid growth from Bristol-Myers Squibb, we do expect adjusted earnings-per-share growth over the next several years of 3% (or potentially more). And the 3%+ dividend yield “pays investors to wait” for valuation multiple expansion, which is where we believe the bulk of returns will come from for Bristol-Myers Squibb stock in 2022 and/or potentially beyond.
On the date of publication, Ben Reynolds held a long position in BMY stock.
Ben Reynolds founded Sure Dividend in 2014. Today, Ben continues to run Sure Dividend to help individual investors build high quality income portfolios. Ben graduated Summa Cum Laude from University of Houston with a finance degree. His work through Sure Dividend has appeared on Forbes, Fidelity, Motley Fool, The Street, Yahoo! Finance and more.