When dividend yields begin to rise, investors would do well to pay close attention to whether potential risk signals are lurking beneath the surface. Bristol-Myers Squibb (BMY), as a leading pharmaceutical company, has long been a representative of high-dividend stocks. Over the past decade, the stock has delivered an average dividend yield of 3.4%.
However, for most of the past two years, this yield has remained at unusually elevated levels. The stock currently offers a dividend yield of 4.1%, and at one point during the last 24 months, it reached as high as 6%. Is today’s bountiful dividend truly reliable? In this author’s view, the company’s current dividend level is presently sound, but investors should be alert to potential hurdles in the coming years as patents on several core drugs approach expiration.
Examining the financial data is the best way to determine whether a company can genuinely afford its dividend payouts. Bristol-Myers Squibb’s current annual dividend totals $2.52 per share, paid on a quarterly basis. Wall Street analysts expect the company to post earnings per share of $6.34 this year, which would cover the dividend by 2.5 times. Additionally, when verified through the lens of free cash flow—given that dividends are technically a cash outlay—the company generated free cash flow of $5.83 per share over the past year, also more than double the amount required to cover the dividend. From a numerical standpoint, the company is fully capable, and with relative ease, of sustaining its current dividend, suggesting that the risk of a near-term cut appears low.
Nevertheless, the outlook is not entirely without concern. Patents on several of Bristol-Myers Squibb’s best-selling drugs are set to expire over the coming years. As patent protection lapses, generic competitors will enter the market with lower-priced alternatives, and sales of these branded drugs are expected to decline significantly. This is a normal phase in the drug lifecycle and is a common occurrence in the pharmaceutical industry. This phenomenon is known as the “patent cliff,” and Bristol-Myers Squibb faces a particularly steep one. Among the drugs affected, the anticoagulant Eliquis and the cancer therapy Opdivo are both likely to face generic competition around 2028—last year, these two drugs together generated more than $6.1 billion in sales, accounting for roughly half of the company’s total revenue. However, the situation is not entirely gloomy: branded drug sales do not vanish overnight after patent expiration. Moreover, the company possesses a robust pipeline of investigational products, and new drugs within its growth portfolio are steadily stepping up to take over.
The market currently views Bristol-Myers Squibb as a relatively high-risk stock, and this perspective is not without justification. Fortunately, the company’s dividend still has a considerable cushion, and new drug growth continues to advance. In this author’s view, management may choose to slow the pace of dividend increases—for instance, by moderating the magnitude of raises during critical years when navigating patent expirations, in order to conserve cash. But barring a catastrophic failure, investors can still reasonably trust the stock’s 4.1% dividend yield for now and for some time to come.
In summary: Bristol-Myers Squibb currently relies on solid earnings and free cash flow to support its high dividend, with low near-term risk of a cut. However, the concentrated patent expirations of core products in the coming years, constituting a patent cliff, will be a key variable affecting the long-term sustainability of the dividend. While enjoying the current high yield, investors should closely monitor whether new drug growth can successfully take over the baton, as well as any subsequent adjustments in management’s cash allocation strategy.
