Immune to Obamacare, Plus a Nice Yield

04/20/2010 1:30 pm EST


Roger Conrad

Chief Analyst/Managing Partner, Capitalist Times

Roger Conrad, associate editor of Personal Finance, says Bristol-Myers Squibb has a strong pipeline, pays healthy dividends, and won’t be hurt by health care reform.

The immediate reaction of [health care] industry stocks to the omnibus legislation passed last month has been relatively benign. The real question, however, is what happens to companies when the new law’s various fees start to kick in.

The Income Portfolio’s health care representative is global pharmaceuticals and biotechnology titan Bristol-Myers Squibb (NYSE: BMY). Since our original recommendation [on] February 10th, we’ve realized a modest profit. The stock also pays a dividend of nearly 5%, paid around the first of February, May, August, and November.

Bristol-Myers’ strategic refocus on drug development continues to pay off; last month the company and partner Sanofi-Aventis (NYSE: SNY) won regulatory approval to sell a combination blood thinner in Europe. Although its products have faced more scrutiny under the Obama Food and Drug Administration, management has thus far avoided trouble here as well.

The balance sheet earns an A+ rating from Standard & Poor’s, and there’s enough cash in the bank to pay off all long-term debt with $2 billion plus to spare. Earnings from continuing operations, meanwhile, are slated to grow 16% to 22% in 2010. And management has the pieces in place to ensure robust profits well past 2013, when the company and partner Sanofi will lose exclusive rights in the US to sell blockbuster drug Plavix.

The “floor” profit estimate for that year is now $1.95, or a payout ratio of just 65.6% on the current annual dividend rate of $1.24 per share. And actual earnings could be much higher; five major new drugs hit the market by 2012, including treatments for cancer, diabetes, and heart disease.

The key is whether there’s anything in the new health care law to derail Bristol-Myers’ strategy. The answer appears to be no. The 2,000-plus pages include new fees on pharmaceutical companies that start as soon as 2011 and rise to $4.8 billion per year sector-wide.

Even with 60% of revenue coming from the US, however, Bristol-Myers will feel only a fraction of that. Moreover, with so much of future revenue coming from its now robust development pipeline, it will pass all of that and more on to consumers. Bristol-Myers Squibb is a great buy for growth and income up to $26. (It closed just below there Monday—Editor.)

[There] is a clear warning sign that bonds, particularly the long-term variety, are in bubble mode. With income equities offering far superior yields, there’s no excuse for being caught when it bursts.

What’s bearish for bond buyers is extremely bullish for stockholders. The best dividend stocks are headed for solid capital gains in the months ahead, even as bonds are at growing risk of steep declines. And that’s in addition to growing distributions that are already vastly superior to the pittance being paid out by bonds.

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