Health is priceless; health care isn’t.
As a biotechnology company, Amgen, Inc. (NASDAQ:AMGN) benefits from many of the unique elements of the industry that make it attractive for dividend investors. We all know it’s impossible to put a price on one’s health and well-being. Because of that, and due to the unbearable cost of emergency health problems, insurance companies and government entitlement programs have taken over as the gatekeepers of health care spending around the world.
But the industry’s high costs didn’t just appear out of thin air. Partly to blame is the fact that our insurance systems have effectively masked the direct costs of health care by turning the system into a kind of all-you-can-eat buffet, removing most of the consumer-driven pricing mechanisms that exist in practically every other industry. This dynamic, along with the aging and increasingly unhealthy society that we’re all well aware of, is a key reason health care spending will continue to grow.
But while these big picture trends might be driving the overall industry, investors looking at specific health care dividend stocks need to dig a layer deeper to understand the company-specific issues at work. After all, dividends aren’t a guarantee, and if the going gets tough enough, even a “stable” health care stock could cut — or eliminate — its dividend. With that being said, let’s check on where Amgen, Inc. (NASDAQ:AMGN)’s dividend has been, and try to determine where it’s going.
Payout ratios
A quick-and-dirty technique for checking a dividend’s sustainability is taking a look at something called the payout ratio. Typically this is expressed as a percentage, looking at a company’s dividend per share relative to its net income per share. That’s a decent start, but I prefer to use a slightly different measurement that replaces net income, an accounting measurement, with something more tangible – cold hard cash. The chart below shows how much of Amgen’s free cash flow has been eaten up by its dividend payments over the past two years. The lower the better, suggesting more capacity for future dividend hikes.
Up to this point, we’ve looked at Amgen, Inc. (NASDAQ:AMGN)’s dividend in the past, and we’ve also seen how its stock is being perceived by the market today. However, the most important factor to consider when understanding a dividend’s future is where the company’s cash flow is heading. It’s hard to generate more cash without growing sales, so let’s take a look at what industry analysts are expecting for Amgen’s revenue growth relative to peers this year.
Amgen, Inc. (NASDAQ:AMGN) hasn’t been shy about returning more cash to shareholders since initiating a dividend in 2011. Since then, its quarterly payout has soared, rising nearly 70% and providing a unique opportunity to for income-oriented investors to gain exposure to the exciting biotech industry.
But paying a dividend is proof that Amgen, Inc. (NASDAQ:AMGN) isn’t the high-growth biotech it once was, and the company faces numerous challenges within its core markets. The company recently announced a 30% dividend increase, but it probably can’t continue raising its dividend at such high rates without sacrificing investments in other areas.
The article Does Amgen’s Dividend Have Room to Soar? originally appeared on Fool.com and is written by Brenton Flynn.
Brenton Flynn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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