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introduction

I am always looking for additions to my dividend growth portfolio. While sometimes all I do is just add more stocks to attractive positions I already own, I’m always on the lookout for new opportunities. In this article, I’ll take a look at a business that I analyzed once in 2021 and put it on my watchlist but haven’t pulled the trigger yet.

In 2021, I have found Amgen (AMGN) to be a decent addition to every dividend growth portfolio. Since the article’s publication, the stock has remained stable relative. When I look at the whole year, stocks are down 3%. However, the outlook for the business has improved since then, and I think it’s a good time to take another look at the business.

I will analyze the company using the chart below, which represents my methodology for analyzing dividend growth stocks. I use the same methodology to make it easier for me to compare the stocks analyzed. I will examine the fundamentals, valuation, growth opportunities and risks of the business. I will then try to determine if it is a good investment.

How to analyze a business(Graphic produced by the author)

According to the company presentation of Seeking Alpha: “Amgen discovers, develops, manufactures and supplies human therapeutics worldwide. Its focus is on inflammation, oncology / hematology, bone health, disease cardiovascular, nephrology and neuroscience Amgen serves healthcare providers including physicians or their clinics, dialysis centers, hospitals and pharmacies.

Amgen logo

(Source: Wikiepdia.org)

Fundamentals

Income has grown slowly over the past five years. While 12% isn’t very impressive for a five-year period in this industry, the pace has picked up over the past two years. Amgen is increasing its revenue both through organic growth and its drug portfolio and by using mergers and acquisitions to buy drugs and companies that match and complement its portfolio. According to Seeking Alpha’s Business Snapshot, investors should expect mid-to-high single-digit revenue growth.

Graphic
Data by YCharts

BPA GAAP has evolved with revenue over the past five years. However, if we look at adjusted EPS, profits have increased by over 40%. The company’s EPS is increasing due to organic growth, aggressive acquisitions and share buybacks over the past five years. The company has also improved its margins over the past five years. According to Seeking Alpha’s Business Snapshot, investors should expect single-digit EPS growth.

Graphic
Data by YCharts

The dividend Amgen pays is relatively new. It was initiated in 2011 when the company was reaching maturity and had significant cash and FCF reserves. The current yield is attractive at 3.1%, and the company just increased the distribution by 10% last month, more than enough to keep up with inflation. The dividend is safe because the company pays 70% of its profits GAAP. When using less conservative non-GAAP earnings, the payout ratio is very manageable at less than 50%.

Graphic
Data by YCharts

In addition to the company’s generous dividend, management is also using excess cash flow to significantly reduce the number of shares outstanding, taking advantage of what they see as low valuation. The number of shares in the company has been reduced by nearly 25% over the past five years, and the company aims to continue repurchasing shares to increase shareholder returns.

Graphic
Data by YCharts

Evaluation

The P / E ratio has declined in the last few months since posting my article on Amgen. This is the result of the share price stagnating as the fundamentals and outlook for the company have improved. In my opinion, 12.67 times the profit for a reliable company with a history of decent growth and a positive outlook is a fair assessment.

Graphic
Data by YCharts

The chart below from Fastgraphs emphasizes the history of valuation. The company is trading for a lower valuation than its historical valuation. The company’s average P / E is near 19, and the current P / E ratio is 30% below historical valuation. Thus, despite a growth rate lower than the historical growth rate of 13%, the shares are valued at their fair value.

(Source: Fastgraphs.com)

In conclusion, Amgen offers its investors solid fundamentals, shareholder-friendly management and fair valuation with some signs of undervaluation. The revenue growth will drive EPS growth which executives lead to dividend growth similar to the generous 10% increase we just saw. This whole package comes at a fair appraisal. If the company has strong growth opportunities and limited risk, it will be a good candidate for dividend growth investors.

Opportunities

The company is benefiting from growing demand for its drug portfolio. Prolia is just one example of a key drug in Amgen’s portfolio that recorded 15% year-over-year sales growth in the last quarter. Repatha, another flagship drug in the portfolio, saw even more impressive growth of 33%, but from a much lower base. Amgen manages to increase sales of current drugs while developing new ones.

“We believe that we are in a position to deliver compelling long-term results and we hope that they will be built on the solid foundation that we have established now for Repatha, Otezla, our bone health franchise, which of course includes Prolia and EVENITY. “

(Robert Bradway, CEO and Chairman, at Goldman Sachs 14th Annual Healthcare CEO Conference Call, 6/1/2022)

Another growth opportunity is Amgen’s strong pipeline with several promising drugs. AMGEVITA, for example, is a very promising drug, as it intends to be a biosimilar version of Humira once patent protection is lifted in 2023. Humira is the best-selling drug in the world, and it is a major opportunity for Amgen in addition to other drugs in its pipeline.

“When we think about the next few years, we’ll launch AMGEVITA in the US, we’ll be in the first wave of biosimilars for HUMIRA, and we’re excited about what it means. And then soon after, in the years to come, we expect to be in the first wave for STELARA, for SOLIRIS, for EYLEA. So a lot will happen in our inflammation franchise, including biosimilars.

(Robert Bradway, CEO and Chairman, at Goldman Sachs 14th Annual Healthcare CEO Conference Call, 6/1/2022)

Another great sign of growth is the gradual improvement in outlook and friendliness with shareholders. Amgen’s current outlook for 2021 is higher than just a few months ago when I analyzed the company. In addition, analysts have also raised their expectations for 2022 during the same period. This is nothing new, as the company has exceeded expectations over the past decade, exceeding expectations and, as the CEO said, it has generated significant returns for shareholders.

“So if you just look at the financial data over the last decade, we’ve added $ 8 billion in revenue. We multiplied earnings per share by 2.5. We have multiplied the dividend by 5 during this period. period.”

(Robert Bradway, CEO and Chairman, at Goldman Sachs 14th Annual Healthcare CEO Conference Call, 6/1/2022)

Risks

Competition is the first risk for any company in the pharmaceutical sector. The business is capital intensive and companies face other peers who are also developing patented medicines that can be just as effective. In addition, Amgen also faces competition from generic drugs. It is a highly competitive activity where R&D expenses are important to maintain leadership over the long term.

In addition, Amgen also faces a high level of debt. Since I wrote about the company, the debt level has increased by 10%. Debt levels on EBITDA have reached 3.1, which is also higher than what we saw just 6 months ago. Debt can limit a company’s ability to invest heavily or to engage in M&A activity, which has been an important part of its growth strategy over the past decade. The company has more than $ 10 billion in cash and cash equivalents and could consider using some to reduce its level of debt.

Graphic
Data by YCharts

Interest rates will rise in the short to medium term. The inflationary environment will push the Federal Reserve to raise rates probably faster than it anticipated a few months ago. Higher rates for Amgen will result in higher interest charges, which can weigh on EPS and limit the flexibility of the company. Most of the debt will not fall due soon, so this is a challenge that will be addressed slowly.

Conclusion

Amgen is a great company. The management team has managed to lead it to impressive accomplishments over the past decade, rewarding shareholders. The company benefits from strong fundamentals, which I consider to be a fair assessment, and most importantly that it has great growth opportunities going forward which will lead to further growth in income, EPS and dividends, driving returns. totals for shareholders.

While the business faces several risks, including competition, debt levels and interest rates, it appears management is well prepared to manage them. Therefore, I think Amgen is a nice addition to your dividend growth portfolio as its price has remained unchanged but the fundamentals have improved.

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