Key Points
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Bristol Myers Squibb’s yield is well above the pharma average, and it has patent expirations on the horizon.
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The payout ratio isn’t outlandishly high, and the company is financially strong, as it deals with pretty normal issues in the drug sector.
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Pharmaceutical giant Bristol Myers Squibb (NYSE: BMY) is offering investors a 4.5% yield. That is well above the 1% you’d collect from the S&P 500 index (SNPINDEX: ^GSPC ) and the 1.6% average for the drug sector. While the yield looks relatively attractive, given how high it is, prudent investors will wonder if the dividend is safe. It’s highly likely that it is, and here’s why.
Bristol Myers Squibb is a well-run business
Bristol Myers Squibb isn’t an upstart drug company; it has been in business for a very long time and is highly respected. Notably, its dividend hasn’t been increased every year, but it has trended higher for decades. That’s an indication of the company’s strength as a business and of the board of directors’ understanding of the dividend’s value to shareholders.
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At the end of the day, it is the board of directors that will decide Bristol Myers Squibb’s dividend policy. However, dividend investors should consider several key statistics when evaluating the safety of the drug maker’s lofty yield. For example, the dividend payout ratio is around 72%. That’s kind of high, but not outlandishly so. There’s some room for adversity before a cut would likely be in the cards.
There are reasons to worry about Bristol Myers Squibb’s dividend
That said, Bristol Myers Squibb has some important drugs losing patent protection: Revlimid, Pomalyst, and Eliquis, which is marketed with Pfizer (NYSE: PFE). Patent loses will put material pressure on its top and bottom lines over the next couple of years. Although the company is working to develop new drugs to replace the lost revenue, timing mismatches between patent losses and new drug development are common in the pharmaceutical sector. The payout ratio could rise in the near term.
Which is why a look at the company’s balance sheet is equally important. For starters, Bristol Myers Squibb has an investment-grade credit rating, so it is financially strong. Notably, the debt-to-equity ratio is currently 2.2x, down from 3x at the end of 2024. Interest coverage is 6.3x, suggesting ample leeway for the company to meet its bond obligations. All of this suggests that, if needed, the company could take on additional debt to support its business and dividend if needed.
Not for super conservative investors, but not a huge risk either
If you simply can’t tolerate uncertainty, then maybe Bristol Myers Squibb’s 4.5% yield won’t be a good fit for your dividend portfolio. However, for most investors, the company’s long and successful history, lofty but not unreasonable payout ratio, and strong financial position should provide ample confidence that the dividend will hold through the patent expiration headwinds Bristol Myers Squibb is facing right now.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
