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Amgen (AMGN): Dividend Hike Presents Near-Term Trading Opportunity

 November 26, 2012 09:54 AM
 


(By Mani) Biotech firm Amgen, Inc. (NASDAQ: AMGN) is expected to increase its dividend by 30-35 percent in December that would bring in new, additional capital into the company.

The company is poised to give more returns to shareholders in the form of dividends as its mature franchises are generating more than $5 billion a year in operating cash flow, which it could use to pay dividends and buyback shares.

Moreover, Amgen is the only large cap biotechnology company paying a dividend, which may attract a broad range of generalist, dividend, and value investors.

Amgen has announced plans to return 60 percent of adjusted net income to shareholders via buybacks and dividends by 2015. As the stock price has increased, the company has decreased the total amount of capital spent on buybacks and the majority of capital returned to shareholders will be via dividends going forward.

[Related -Amgen, Inc. (NASDAQ:AMGN): What Will Drive Amgen This Year?]

"We continue to see the trend of declining buybacks in 4Q12 as supporting our thesis. We believe that a large dividend increase for a very large and liquid company may attract more dividend/value investors into the name around year-end," Oppenheimer analyst Boris Peaker said in a note to clients.

Specifically, Amgen ended the third quarter of 2012 with 768.1 million shares outstanding and reported 767.4 million shares on Oct 29, suggesting that the company bought about 700,000 shares back in October, and is estimated to buy back 10 million shares in 2013.

[Related -Amgen, Inc. (AMGN) Q3 Earnings Preview: Pipeline In Focus]

"Based on an estimated adjusted income of $5.4B ($6.97/share), $6.4B ($8.30/share) and $6.4B ($8.38/share) in 2013, 2014, and 2015, respectively, we model dividend growth of 35% annually," Peaker said.

From a timing perspective, some biotech investors may be expecting a dividend increase announcement in early 2013 at the JP Morgan conference or at the analyst meeting. However, Amgen has a board meeting scheduled for December, and it is believed that the 2013 dividend will be announced shortly thereafter.

"We model a 35% dividend increase from $1.44/share in 2012 to $1.94/share in 2013. That is ~$1.5B in dividend payments in 2013. If the company opts for buybacks instead, we anticipate the buyback allocation to be significantly higher, $3B-5B," Peaker said.

One risk to the dividend estimate is the potential concern about tax increases on dividends in 2013. It is possible, as an alternative to a dividend hike, the board may announce increased allocation to the buyback program for 2013. Either way, it is expected to have a positive impact on the stock.

Amgen, which has a dividend yield of 1.6 percent, has a payout ratio of 29 percent implying that it has room to increase its dividend. Even at 35 percent growth rate, the stock a payout ratio of only 48 percent of adjusted net income in 2015, suggesting potential upside to the estimated dividend growth.

Over the last three years, Amgen has raised over $14 billion in debt and repurchased over $15 billion in stock. In 2011, it returned $500 million to shareholders through dividends. The company is on pace to return more than $1.0 billion, or about 20 percent of its earnings, to shareholders for 2012.

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