Why Gilead Sciences, Inc. Can Bounce Back: A Delicious 3% Dividend Yield
February 10, 2017
Companies can often be the victims of their own success. Gilead Sciences, Inc. (NASDAQ:GILD) stock, for example, skyrocketed roughly 400% from 2012 to 2016 thanks to a quadrupling of revenues over the same time period. However, a recent string of double-digit top- and bottom-line declines have GILD stock down nearly 40% from its 52-week highs. Ah, the perils of growth investing.
The latest bit of damage came yesterday, when another bad quarter sent GILD stock plummeting about 8.5%. For a company with such a massive market cap, that’s quite the plunge.
Of course, GILD stock does pay a dividend, so this big pullback might spell an opportunity for us income-oriented bargain hunters.
Let’s take a look at the Q4 results.
Gilead’s Narrowing Lead
Gilead’s struggles continued in the fourth quarter, as earnings and revenue plunged 34% and 14%, respectively. Driving the decline was a 16% drop in antiviral revenue, which includes sales of the company’s key HIV and chronic hepatitis C (HCV) products. So no matter which way you slice it, Gilead’s quarter was brutal.
But wait, there’s even more bad news. Management said the company now sees full-year 2017 sales of between $22.5 billion and $24.5 billion, representing a drop of roughly 22% from 2016. Furthermore, the company expects HCV sales of just $7.5 billion to $9.0 billion, down drastically from $14.8 billion last year.
In other words, not even Gilead expects things to rebound organically anytime soon. Instead, management is setting its sights on a key acquisition (or three or four) to help stem the tide of declines.
“[W]e will continue to maintain our strong operating and financial discipline and focus our efforts in 2017 on continuing to build out our pipeline, aggressively progressing internal programs and pursuing partnerships or acquisitions that are the right strategic fit with our company,” said CEO John Milligan in the conference call with analysts. “I’m confident in the future of Gilead, and I’m looking forward to sharing with you the many accomplishments across this organization in 2017.” (Source: “Gilead Sciences (GILD) Q4 2016 Results – Earnings Call Transcript,” Seeking Alpha, February 8, 2017.)
Pleasant Surprise
However, there was one huge positive update from Gilead which should absolutely sing to us as income investors: management bumped its dividend a healthy 10% for 2017.
Because despite all of its troubles, Gilead still managed to generate an impressive $16.5 billion in operating cash flow in 2016 and $3.5 billion in the quarter. For the full year, Gilead used $11.0 billion to repurchase shares and $2.5 billion to pay dividends.
That reinforces the bullish notion that although sales are in decline, the pricing power of Gilead’s HIV and HCV franchises, coupled with relatively low sales and manufacturing costs, still give the company massive, industry-crushing margins.
Furthermore, Gilead’s relatively small payout ratio of 17% leaves plenty of room for further double-digit dividend increases down the road.
The Bottom Line on GILD Stock
GILD stock is a particularly intriguing bet at the moment. HCV patient demand is plummeting and the near-term pipeline is relatively bare, so key acquisitions are clearly required to appease growth-oriented investors.
However, with still-very-stable cash flow and roughly $32.0 billion in cash on the balance sheet (versus $26.0 billion in debt), odds are good that management will have both the time and buying power to find some growth-fueling purchases. With GILD stock now sporting a dividend yield of three percent, as well as a paltry forward price-to-earnings ratio of six, patient income investors might even want to bet on it.
