September Stock Purchase – Amgen

In Search of Dividend Growth

The dividend stocks in my accounts and the accounts of Mrs. Gravy are almost exclusively slower dividend growers.  They are either the stalwarts like JNJ, or higher yield/slow growers like T, SO and REIT stocks.  In general, I don’t see many increases at or above 10%.  My plan is to find a few holdings that are potentially better at pumping up the income growth, just for a little balance.  If I can invest where capital gains might come along with the dividends, so much the better.  That old total return thing, you know.  

This caused me to take a look at Amgen (AMGN).  Along with searching for some dividend growth, there has been a desire to add a little diversity to our healthcare sector investments.  Until now, this sector contained only JNJ.  My purchase of AMGN was small and doesn’t affect sector weight much, but it’s a start.

I purchased Amgen on 9/25/15 at $138/sh, yielding 2.3%.  It now has 1.8% weight and provides 1% of our portfolio’s income.

A Little More Risk

AMGN is a biotech stock.  That alone can imply risk and/or volatility.  The 52 week high is around $180 and the low is $127.  That’s a pretty significant price range.  It has a beta of 1.12 according to Morningstar.  The priced isn’t helped by some in government who are grumbling about drug companies charging exorbitant fees for their products.

Hillary Clinton has recently made comments to that effect, stating that she will clamp down on these companies when she becomes President.  That seemed to spook some investors, pushing prices down for many companies in the sector.  My viewpoint is slightly cautious, though I’m not wringing my hands out of worry.  I guess the first issue is that Ms. Clinton is not the President yet.  Who knows how that will come out?  My next thought is at least one chamber will be controlled by her Republican nemeses.  It won’t be easy to shove a lot of anti-business legislation through, even if she should be elected.  Please note…. I’m not making a political statement here.  It’s just an observation.  Please refrain from barraging me with pro/con Hillary comments.  🙂

What I like about AMGN

The Dividend (and its growth): 

Dividends have been paid by AMGN for only about 4 years.  Dividend Aristocrat it’s not.  It’s also not paying a high current yield.  I bought at $138 and a yield of about 2.3%.  That’s slightly below what I consider to be my minimum (2.5%), but I chose to make an exception because of the potential for dividend growth and capital appreciation.

According to M*, the 3 year dividend growth rate is 63.3% and the one year is 29.8%.  No doubt, this kind of growth cannot continue over a period of many years, but my hope is that it will grow at double digits for a while.  The current payout ratio is still below 40.  The current yield, at 2.3%, is also as high as it has ever been.

Valuation:  

The main FAST Graph indicates a fair to slightly undervalued price based on earnings.  The current P/E of 15 compares favorably to the “normal” P/E of 24.4.   AMGN FG 20151004

 

Analyst estimates have generally been pretty accurate with this stock.  The next graph displays forecasts based on analyst estimates.  The price seems fairly valued with an estimated annual return of almost 11% over the next few years.

AMGN FG1 20150924

 

Yet another graph depicts the forecast should AMGN return to its historical P/E range.  It predicts possible annual returns of over 27%.  I can’t imagine a return of the magnitude and would certainly be happy with something a little lower.

AMGN FG2 20150924

 

  • Morningstar rates AMGN a five star strong buy with a fair value of $194 and a  credit rating of A.  In an article, M* also states “wide-moat Amgen (AMGN) looks the most undervalued [in the biotech sector]. We think the firm’s very strong cost-cutting efforts and their advancing pipeline more than offset biosimilar pressure. Amgen is positioned to be one of the top three biosimilar players globally as well.”  (Apparently, “biosimilar” is the biotech industry’s version of “generic”.)
  • S&P rates AMGN a four star buy with a 12 month price target of $202 and fair value of $170.
  • Jefferson Research rates AMGN a buy and as being the “strongest” and/or “least risk” in the five categories it uses in evaluating a stock.

So…. there we have it.  I’ll be watching AMGN and may elect to add further from here.  My maximum allocation for this stock is set at 3%.  I believe it to be a strong company though I still see it as somewhat speculative in that it’s a biotech stock.  My view overall is that the risk is worth the potential payoff.

What are your thoughts on AMGN?  Does it belong in a DGI portfolio?  Thanks for reading.

Steve

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4 responses

  1. $138 is a great price for AMGN. Congrats on picking up this company..Im sure it will do well over the long run.

    R2R

    1. R2R,

      Thanks for your comment. While one never knows with certainty, doing well over the long run is certainly in my plans.

      Steve

  2. […] Gravy bought Amgen (AMGN). I’m not too much into biotech but I like to learn about company I don’t know much […]

  3. […] the number of holdings in the healthcare sector.  I discuss my original September purchase in this article, and my January purchase was made for the same basic reasons, though at a slightly higher […]

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