Falling interest rates have sparked rallies in equity sectors that offer reliable dividend yields. Consumer staples, REITs and utilities are all trading near all-time highs.
Value in the dividend space has thus become difficult to find. But it can still be found in a handful of healthcare names, and one of them is Amgen (AMGN) - Get Report , even as the stock has rallied in recent weeks.
Missing Forest for Trees
From 2012 to 2018, Amgen's average annual bottom-line growth figure exceeded 15%. Historically, this company has been known for its reliable top- and bottom-line growth, not to mention generous shareholder returns.
This combination has made Amgen a favorite among both growth managers and income-oriented investors. But the Thousand Oaks, Calif., company appears to have hit headwinds in 2019.
Wall Street's current consensus estimate for Amgen's 2019 earnings per share is down 2%. Analysts are more bullish for 2020 and 2021 EPS growth, estimating rises of 4% and 5%, respectively.
If 2019 EPS indeed decline, a bounceback in 2020 and 2021 would be welcome. But mid-single-digit growth prospects are a far cry from the double-digit results that investors have come to expect, which is why the stock's multiple has been rerated downward.
From 2015 to 2018, Amgen traded in a range of 13 to 15 times earnings. Because EPS grew strongly in those years, the stock did well without the added benefit of an expanded multiple.
But during Amgen's weakness earlier this year, it broke through that 13-times support level.
When the stock traded down into the mid-$160s in late April and early June, shares were valued at less than 12 times trailing 12-month earnings. The premium on the shares hadn't been that low since 2011.
This relative discount makes sense when the lower growth expectations are applied. Amgen had lost momentum with the shares trading below their short-term moving averages.
But the stock was being priced at a significant discount to many of its large-cap biotech/pharma peers and this divergence didn't quite make sense.
Amgen isn't alone when it comes to healthcare names with muted expectations in 2019. Analysts have cautious outlooks for many of the large drugmakers.
Patent expirations on some of the world's largest drugs are nearing, and price increases are being policed by the media and politicians alike, forcing pharma companies to seek growth outside established portfolios.
This is why we're witnessing large-scale M&A in the healthcare space. Amgen hasn't joined that trend just yet, but noteworthy is that the company has a $30 billion war chest at its disposal.
When the stock fell to $175 from $190, the move appeared to be based on negative sentiment surrounding the healthcare space and threats of healthcare reform regarding a single-payer system/Medicare for All from prominent Democratic Party voices. The prospect of legislative reform adds uncertainty to the healthcare-investment equation.
But Amgen has been a proven winner for years, providing a 20% CAGR to investors since its IPO back in 1983. Ignoring this because of potential short-term concerns is missing the forest for the trees.
Sustained success like Amgen's doesn't happen by accident. This isn't a one-trick pony. This is why I've previously said that Amgen shares were babies being thrown out with the bathwater.
Low Rates Vs. Healthcare Reform
Hindsight shows I was about $10 too early on that call. Yet as Amgen fell, I never lost faith in this investment.
But the company is still widely viewed as a cornerstone healthcare investment in income-oriented portfolios because of the enormous dividend growth that it has produced since initiating its payments nine years ago.
Like its EPS CAGR, Amgen's dividend growth CAGR is above 20%, and when you're compounding wealth at rates like these, generating serious wealth doesn't take long.
As interest rates continue to fall worldwide, yield-starved investors increasingly will seek out equities with defensive products that generate predictable cash flows that in turn translate into reliable yields.
If we stay on the easy-money track, I suspect Amgen's multiple is likely to expand further. This bodes well for the stock in the short term and could easily cancel out the pressure from healthcare-reform rhetoric.
Democrats just held their first major debate ahead of the 2020 presidential election and healthcare appears set to remain a primary talking point in the primary season. Both parties seem focused on healthcare and this could generate further headwinds for big pharma names.
Amgen, however, is trading back above its 50-day moving average and closing in on the 200-day figure.
This recent rally could easily continue due to the company's attractive 3.1% dividend yield and greener growth pastures ahead. And at only 13 times earnings, the downside for long-term investors appears limited.
Nicholas Ward is long Amgen, Johnson & Johnson and Medtronic.