Pick up 4%+ yield and decent potential appreciation by buying Bristol-Myers Squibb on yesterday's drop

08/03/2012 11:47 am EST


Jim Jubak

Founder and Editor, JubakPicks.com

Take what the market gives you—especially since the extreme fear and volatility in this market is magnifying every bit of bad news.

So yesterday Bristol-Myers Squibb (BMY) fell like a stone through butter—the shares closed down $3.05, or 8.6%, to $32.55—on news that the company had suspended the Phase II trials for its BMS-094 hepatitis C drug because of a safety issue that seems to be related to a heightened risk of heart failure. Given how competitive the hepatitis C market is at the moment, the setback is significant. BMS-094 was a major part of Bristol-Myers $2.5 billion acquisition of Inhibitex in February 2012.

But given that BMS-094 wasn’t the company’s only hepatitis C drug candidate, I think yesterday’s disappointment and drop is an opportunity to pick up a very attractive 4.15% dividend.

The rap on Bristol-Myers is that the company faces a big hit to revenue from patent expirations. The company’s blockbuster Plavix heart disease drug went off patent in May and Standard & Poor’s projects that sales of Plavix will drop by 60% in 2012 from 2012 levels. And the company’s drugs Avapro (hypertension) and Abilify (schizophrenia) both lose patent protection by 2015.

But the company has been aggressively acquiring new drug candidates, especially in the cancer, hepatitis C, and diabetes areas to make up for the losses. So despite the huge loss of sales from Plavix, Standard & Poor’s is estimating that total sales in 2012 will fall by just 15%.

I’m not in love with Bristol-Myers Squibb and I certainly don’t intend to get married to the stock, but in this very volatile market with a slowing global economy, I’m more than willing to date these shares. If the market has a sweet spot over the next few months, I’d be willing to bet that it will be high-yielding, blue chip stocks with solid positive cash flows that can be used to buy back shares or increase dividend payouts. In the fiscal 2012 year that ended in June, Bristol-Myers reported $1.6 billion in operating cash flow and the company spent $860 million to buy back shares.

Today I'm adding the stock to my Jubak's Picks portfolio. I’d put a $38 12-month target price on the stock. That would be a potential gain of 16.7% from yesterday’s close plus that 4.15% dividend.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Bristol-Myers Squibb as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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