Editor’s note: This column is part of InvestorPlace.com’s Best Stocks for 2022 contest. Sure Dividend’s pick for the contest is Bristol-Myers Squibb (NYSE:BMY) stock.
Bristol-Myers Squibb (NYSE:BMY) has generated strong total returns of 21% so far in 2022. The S&P 500 ETF (NYSEARCA:SPY) has total returns of -18% over the same time period for comparison.
BMY Stock Valuation Multiple
Bristol-Myers-Squibb’s low valuation at the end of 2021 stood out. BMY stock appeared significantly undervalued. Here’s what I said about the company at the end of 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.
“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%.”
Valuation multiple expansion is responsible for the bulk of gains in 2022 for Bristol-Myers Squibb stock. The company’s valuation multiple has expanded from 7.9 to 9.9, using our expected fiscal 2022 earnings-per-share estimate of $7.59.
The valuation multiple is up over 25% through the first half of 2022 alone. Meanwhile, we are expecting only modest earnings-per-share growth in 2022, from $7.51 in fiscal 2021 to $7.59 in fiscal 2022.
While Bristol-Myers Squibb’s price-to-earnings ratio has increased significantly in 2022 so far, there’s still plenty of room left for further valuation multiple expansion.
As mentioned above, the company is currently trading for a price-to-earnings ratio of 9.9. This is still a low price-to-earnings ratio both historically for Bristol-Myers Squibb and compared to the S&P 500’s price-to-earnings ratio of 19.7.
The Future of BMY Stock
Our fair price-to-earnings ratio estimate for Bristol-Myers Squibb hasn’t changed. Here’s what I said on the topic in our initial recommendation on InvestorPlace:
“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…
“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.”
With a current price-to-earnings ratio of 9.9 and a target price-to-earnings ratio of 13.5, we believe that there is still 36% upside to Bristol-Myers Squibb at current prices. The stock still appears reasonably undervalued.
Outside of valuation, Bristol-Myers Squibb is still a high-quality dividend stock based on its 15 years of consecutive dividend increases and established position in the healthcare sector.
And Bristol-Myers Squibb stock still has an above average dividend yield of 2.8%. This isn’t the enviable 3%+ yield the stock offered 6 months ago, but it is well above the S&P 500’s dividend yield of 1.4%.
On top of the low valuation and solid dividend yield, Bristol-Myers Squibb also has modest but positive growth expectations ahead. The company is targeting 1.1% adjusted earnings-per-share growth this year based on the midpoint of guidance. This growth is coming off of excellent 17% adjusted earnings-per-share growth in fiscal 2021. BMY’s adjusted EPS in 2011 was $2.28, representing a 10-year compound annual growth rate (CAGR) of 12.7%.
Don’t Worry About the Patent Cliff
I expect growth to slow in coming years due to the company’s blockbuster pharmaceutical Revlimid beginning to lose its patent protection this year. Indeed, “patent cliff” fears are likely why investors can buy into shares of Bristol-Myers Squibb at such a discount right now.
But fear-influenced investors are missing the bigger picture at Bristol-Myers Squibb. The company’s management team expects low to mid-single digit revenue growth from 2020 through 2025. The company is not expected to shrink, despite current fears.
Despite the runup in price over the first six months of 2022, I continue to believe that Bristol-Myers Squibb is both undervalued and a buy for investors looking for value, safety and dividends.
On the date of publication, Ben Reynolds held a long position in BMY stock.