When I first started covering the biotech sector 20 years ago, it was pretty difficult to find companies that paid dividends. Even today, there aren’t many of them. But there are also some mature biotech companies that are very profitable and cash flow positive and can afford to pay dividends. Amgen Inc. (AMGN) is one of them, explains Marc Lichtenfeld, chief income strategist at Wealthy Retirement.
When most investors hear “biotech stocks,” they think of small, unprofitable companies that often don’t even have revenue yet because they don’t have any approved products. There are lots of biotech companies like that. They need to invest every dollar they have into developing their medicines, so they aren’t able to pay a dividend.
But AMGN pays a $2.25 per share quarterly dividend, which recently came out to a 3.3% yield. Biotech can be notoriously volatile, though, so can investors count on receiving the same dividend quarter after quarter?
Amgen’s free cash flow slid from $8.8 billion to $7.4 billion last year. That is something I do not want to see. Declining free cash flow can be an early sign that a company might struggle to afford its dividend, and Amgen’s one-year and three-year free cash flow growth are both negative.
Fortunately, free cash flow is forecast to leap to $13.3 billion this year. Even if that prediction is way off, this year’s free cash flow will still likely be higher than last year’s (and probably 2022’s as well).
Despite the down year in 2023, Amgen was still easily able to afford its dividend. It paid shareholders $4.6 billion for a 62% payout ratio.
In 2024, it’s estimated that the total amount paid in dividends will rise to $4.9 billion. And thanks to the expected jump in free cash flow, the payout ratio should drop to just 37%.
Amgen has also raised its dividend every year since it began paying one in 2011. So, it has a strong track record of not only paying a dividend, but boosting it year after year.
As long as free cash flow does in fact grow this year, dividend investors should have nothing to worry about. But if free cash flow doesn’t increase in 2024, investors will need to start watching the stock more carefully.
Recommended Action: Buy AMGN.
