Analyzing Amgen’s Dividend Growth Potential

Recap From January’s Picks

On a price return basis the Dividend Growth Stocks Model Portfolio (-2.0%) outperformed the S&P 500 (-2.2%) by 0.2%, and on a total return basis the Model Portfolio (-1.9%) outperformed the S&P 500 (-2.2%) by 0.3%. The best performing stock was up 19%. Overall, 9 out of the 17 Dividend Growth Stocks outperformed the S&P 500 from January 27, 2022 through February 23, 2022.

The methodology for this model portfolio mimics an All Cap Blend style with a focus on dividend growth. Selected stocks earn an attractive or very attractive rating, generate positive free cash flow (FCF) and economic earnings, offer a current dividend yield >1%, and have a 5+ year track record of consecutive dividend growth. This model portfolio is designed for investors who are more focused on long-term capital appreciation than current income, but still appreciate the power of dividends, especially growing dividends.

Featured Stock From February: Amgen Inc. (AMGN)

Amgen Inc. (AMGN) is the featured stock from February’s Dividend Growth Stocks Model Portfolio. I made Amgen a Long Idea in May 2017. Since then, the stock is up 38% while the S&P 500 is up 79%. Despite its underperformance, the stock still offers an attractive risk/reward.

Amgen has grown revenue by 10% compounded annually and net operating profit after-tax (NOPAT) by 11% compounded annually over the past two decades. More recently, the company’s NOPAT grew 6% compounded annually over the past decade. Amgen’s NOPAT margin improved from 29% in 2011 to 30% in 2021, while the company’s return on invested capital (ROIC) from 15.8% in 2011 to 16.4% in 2021.

Figure 1: Amgen’s NOPAT & Revenue Since 2001

FCF Exceeds Dividends by Wide Margin

Amgen has increased its dividend each year since 2011. The company increased its regular dividend from $4.60/share in 2017 to $7.04/share in 2021, or 11% compounded annually. The current quarterly dividend, when annualized, equals $7.76/share and provides a 3.4% dividend yield.

More importantly, Amgen’s strong free cash flow (FCF) exceeds the company’s growing dividend payments. Amgen’s cumulative $34.2 billion (27% of current market cap) in FCF is nearly 2x the $18.2 billion in dividends paid out from 2017 – 2021, per Figure 2. Figure 2 also shows that Amgen’s FCF significantly exceeded its dividend payments in four of the past five years.

Figure 2: Free Cash Flow vs. Regular Dividend Payments

Companies with FCF well above dividend payments provide higher quality dividend growth opportunities because I know the company generates the cash to support a higher dividend. On the other hand, the dividend of a company where FCF falls short of the dividend payment over time cannot be trusted to grow or even maintain its dividend because of inadequate free cash flow.

Amgen Has Upside Potential

At its current price of $225/share, AMGN has a price-to-economic book value (PEBV) ratio of 0.7. This ratio means the market expects Amgen’s NOPAT to permanently decline by 30%. This expectation seems overly pessimistic for a company that has grown NOPAT by 6% compounded annually over the past decade.

Even if Amgen maintains 2021 NOPAT margins of 30% (compared to five-year average of 36%) and the company grows NOPAT by <1% compounded annually for the next decade, the stock is worth $319/share today – a 42% upside. See the math behind the reverse DCF scenario.

Should the company grow NOPAT more in line with historical growth rates, the stock has even more upside. Add in Amgen’s 3.4% dividend yield and history of dividend growth, and it’s clear why this stock is in February’s Dividend Growth Stocks Model Portfolio.

Critical Details Found in Financial Filings by My Firm’s Robo-Analyst Technology

Below are specifics on the adjustments I make based on Robo-Analyst findings in Amgen’s 10-Qs and 10-K:

Income Statement: I made $3.5 billion in adjustments with a net effect of removing $2.0 billion in non-operating expenses (11% of revenue).

Balance Sheet: I made $20.1 billion of adjustments to calculate invested capital with a net decrease of $1.6 billion. The most notable adjustment was $7.4 billion (15% of reported net assets) in asset write-downs.

Valuation: I made $46.3 billion in adjustments with a net effect of decreasing shareholder value by $31.2 billion. Other than total debt, the most notable adjustment to shareholder value was $7.5 billion in excess cash. This adjustment represents 6% of Amgen’s market value.

Disclosure: David Trainer, Kyle Guske II, and Matt Shuler receive no compensation to write about any specific stock, style, or theme.