Gilead Sciences, Inc.: GILD Stock Should Be Taken Seriously by Investors
June 14, 2017
GILD Stock: a New Dividend Growth Story
A stock that offers both growth and income could offer long-term market-beating returns. The growth would come in the form of share price increases, and the income via the dividend.
One such dividend growth investment opportunity is Gilead Sciences, Inc. (NASDAQ:GILD). GILD stock has made a total of nine dividend payments and has increased the payout twice.
Gilead has tons of cash flow thanks to the capital invested into its various products currently in the research and development (R&D) stage. Once these treatments are made available for sale, producing them will only cost a fraction of what R&D did. And income investors always like to see large margins.
Before getting into the financial details of the company, let’s go through what it does to generate a revenue.
Business Overview
Gilead Sciences is a researched-based company in the biopharmaceutical sector. The company discovers, develops, and commercializes various medicines for the likes of liver disease, cancer, human immunodeficiency virus (HIV), acquired immune deficiency syndrome (AIDS), and inflammatory and respiratory diseases.
There are currently are more than 20 different treatments available, with another 25 in the pipeline. These treatments are in different stages of the approval process before final submission to the U.S. Food and Drug Administration and the European Medicines Agency.
Shareholders Get Rewarded
Shareholders have been rewarded in two ways by the company: a growing dividend payment and share repurchases.
Gilead stock’s first dividend was in June 2015, transforming the company from a pure play growth company to a growth- and income-based investment. The dividend’s growth has been at a rate of about 10% on an annual basis.
Gilead’s current share repurchase program is for $12.0 billion and benefits investors by giving them ownership of a larger percentage of the company since there are fewer shares available. This is not the first time the company has bought back shares, as it tends to initiate a new buyback program every year. (Source: “Gilead Sciences Announces Declaration of Q1 Cash Dividend and Increases to Shareholder Return Programs,” Gilead Sciences, Inc., February 2, 2016.)
The benefits of buying back shares for investors are twofold. First, no taxes are incurred with share repurchases until the shares are fully sold. Second, share repurchase programs add support to the share price since there is continued buying of the shares–a bullish indicator to the markets and other investors.
The dividend can continue to grow and shares can be bought back because of Gilead’s modest payout ratio. From earnings, only $0.20 of each dollar earned is paid out as a dividend, providing flexibility to do more without harming the company’s financial outlook.
Shareholders can also thank Gilead’s large cash balance. As of March of 2017, there is approximately $34.0 billion sitting in cash, which is just more than a third of the company’s market cap. This makes a special dividend possible. (Source: “Gilead Sciences Announces First Quarter 2017 Financial,” Gilead Sciences, Inc., May 2, 2017.)
Cheap Valuation
GILD stock is trading at a price-to-earnings (P/E) ratio of 6.8 times, compared to 57.8 times for the overall industry. A lower P/E ratio means less of a multiple is being paid for the company’s earnings.
The potential to see more cash flow being generated through the approval of the treatments in the pipeline could lead to investors bidding up the stock price. This would also result in a higher P/E, which would either be in line with the peer group or be even higher.
Another possibility is an acquisition being made with the large cash balance. This would of course be reflected in the income statements, in addition to leading to a higher P/E trading multiple.
Final Thoughts On GILD Stock
Gilead Sciences, Inc. is a great example of a potential stock opportunity that is cheap and offers various rewards to shareholders. With both growth and income and the potential for higher returns compared to the greater market, GILD stock is worth considering if you don’t want to have any regrets a few years later. That said, I would encourage you to take a harder look at the company before deploying capital into the company.
