The relationship between interest rates and dividend stocks tends to follow a predictable pattern. When the Federal Reserve signals a shift toward monetary easing, investors often rotate toward stable, high-yielding equities that can provide both income and potential appreciation.
Amgen (AMGN -0.20%) offers an intriguing test case for this dynamic heading into 2025. The biotech-giant's shares have slumped 3.37% in 2024, while the S&P 500 has surged 26.8% as of this writing, creating what might be a compelling entry point ahead of what could prove to be a long-winded rate-cutting cycle.
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In November, Amgen reported disappointing obesity-drug results. This highlights why investors need to look deeper than just yield. Below, I'll examine whether Amgen's recent stumbles mask an opportunity in high-yield healthcare or signal legitimate concerns about its premium dividend status.
Portfolio transformation hits some mild turbulence
Amgen's pivot toward rare diseases showed promising momentum in late 2024. The company's specialized therapies generated $1.2 billion in third-quarter sales, highlighting the potential of recent acquisitions.
In November 2024, investors received sobering news about Amgen's obesity ambitions, a key driver of the biotech stock's strong performance earlier in the year. Specifically, the company's mid-stage trial of MariTide achieved 20% weight loss over one year, matching existing treatments. However, it showed higher dropout rates than weekly competitors.
Financial metrics paint an encouraging picture
Amgen's generous 3.23% dividend yield essentially matches its peer group average of 3.28%. Moreover, the biotech's third-quarter cash flow bodes well for the sustainability of its hefty cash distribution.
Operating cash flow hit $3.6 billion in Q3 2024, dwarfing the $1.2 billion the biotech made in dividend payments during the three-month period. As a result, Amgen's 113.4% payout ratio appears less concerning, given this robust cash generation and the company's established market position.
It's also important to note that the average payout ratio among major drug manufacturers stands at a whopping 141%, reflecting the cyclical nature of product portfolios and business development in the pharmaceutical industry. Still, Amgen's elevated payout ratio may mean more modest hikes to the program in the near term. Speaking to this point, the biotech has boosted its dividend by 13.9% on average per year over the prior 10 years, putting it in elite company in the dividend-growth arena.
Portfolio evolution brings mixed signals
Success stories emerged across Amgen's therapeutic areas in the third quarter of 2024. Sales of breakthrough treatments, like the cholesterol-lowering medication Repatha, surged 40% to $567 million, while severe-asthma drug Tezspire posted a 67% jump to $269 million, relative to the same period a year ago.
Nonetheless, legacy franchises still weighed on top-line results in the most recent quarter. For example, Enbrel, a top-selling autoimmune disease treatment, saw sales drop by 20% to $825 million in the third quarter of 2024, underscoring why pipeline execution remains crucial for long-term growth.
A compelling valuation emerges
The market's recent skepticism has created an unusual opportunity. Amgen shares trade at just 13.4 times forward earnings, a remarkable discount to the S&P 500's multiple of nearly 24.
This valuation gap seems overdone, given Amgen's cash-generating power. While the obesity-trial results disappointed some investors, they overshadow the company's expanding presence in lucrative rare disease markets.
Is Amgen a top dividend stock to buy?
Amgen's evolution through 2024 reflects both challenges and opportunities. The impressive 23% revenue growth to $8.5 billion in the third quarter reveals a company successfully navigating its transformation.
Recent market pessimism, in turn, may provide an attractive entry point for patient investors. Amgen's proven ability to generate substantial cash flow while advancing strategic priorities suggests both reliable income and potential capital appreciation.
Furthermore, the biotech's dividend program remains compelling despite near-term headwinds. Therefore, Amgen's combination of above-average yield, a strong growth profile, and a compelling valuation make its stock worth considering ahead of the Fed's anticipated rate cuts in 2025.
