- It has been a year to forget for Gilead stockholders. Gilead stock is down almost 30% in the last one year.
- Declining HCV sales have been a drag on the stock.
- With a strong balance sheet and a dividend yield of 2.5% should income investors consider Gilead stock?
It has not been a good year for Gilead Sciences (NSDQ:GILD) shareholders. Gilead stock is down by more than 25% YTD and almost 30% in last one year. The stock has not only heavily underperformed the broader market but has also lagged the sector index iShares NASDAQ Biotech Index ETF (NSDQ:IBB) which is down nearly 17% YTD. The poor performance of the stock is mainly caused by declining HCV sales numbers. HCV was the main growth driver for Gilead till a few quarters back. But the sales in this segment have seen a consistent decline over the last few quarters which has lead to an increasingly bearish sentiment around the stock. Many analysts believe that the bearish sentiment is overdone, and the stock will rebound on strong fundamentals.
HIV segment continues to drive growth
In Q3, HCV sales came in at $3.3 billion, $300 million lower than analysts estimates. However, the new drug Epclusa showed strong growth, somewhat cushioning the impact of declining sales of old stalwarts Harvoni and Sovaldi. But more importantly, HIV segment crossed the HCV segment as the biggest revenue contributor for the company. Hence, from next quarter impact of HIV segment on Gilead's revenue will be higher than HCV segment. The HIV segment is continuing to show strong growth with the segment growing 18% YoY in the first three-quarters. And there are still a lot of growth opportunities for the company in the HIV segment. Also, the company has a strong pipeline of drugs and is investing heavily in R&D to keep its pipeline strong.
The election of Donald Trump as next US President has brought in some good news for Gilead stock. Firstly, the likelihood of action against the company for "price gouging" has declined heavily. Also, Mr. Trump's proposal to tax repatriation of cash from overseas to U.S. at a concessional rate of 10% instead of 25% can save billions of dollars for the company, if it chooses to repatriate the cash. Gilead has more that $15 billion in overseas cash. Mr. Trump's proposal could save it around $2.2 billion in taxes. Mr. Trump's proposal to lower corporate taxes may not have much impact on Gilead as its current tax rate is very low at 17%. (Also Read: The Rally In Gilead Sciences Inc (GILD) Stock Is Just Getting Started)
Is Gilead a good dividend stock?
Gilead currently pays a quarterly dividend of $0.47, translating into a yearly dividend of $1.88. The stock is currently yielding 2.55%, which is better than the current S&P 500 yield. Also, Gilead had raised its dividend by 9.3% last year in spite of declining revenues. However, Gilead stock has one major drawback compared to other dividend stocks, it has a very short dividend history. Gilead has been paying dividends only for the last seven quarters. It is generally difficult for investors to judge how the company will behave with changing circumstances. Will it cut the dividend when the revenues are declining or when it is facing a cash crunch? We need to analyze the cash flow statements and balance sheet.
Gilead is a cash generating machine. Last year it had generated $20 billion in operating cash flows and almost similar amount in free cash flows. This was more than enough to pay for its dividends and stock buy back. The company had spent $1.5 billion in dividend payments and $9.5 billion in stock buybacks. Last quarter Gilead generated more than $4 billion in operating cash flows, while it spent around $1.7 billion on dividend payments and stock buybacks. Gilead also has around $31 billion in cash and cash equivalent which will provide a cushion in case of a decline in cash flows. With such a strong cash position and healthy operating cash flows, we can see Gilead raising its dividend from here.
However, one major risk for Gilead's dividend could be its rising debt levels. Gilead reported total debt of $27 billion in the most recent quarter (still lower than the cash balance), with its debt to equity ratio coming in at 1.5, which is quite high. Total debt has almost doubled from Q2 2015 when the debt level was around $13 billion. Also, the dividends can come under pressure in case the company goes for a large scale acquisition. However, I think, share buyback will the take the first fall in case of any adverse situation, cushioning Gilead's dividend payouts. (Also read: Gilead Sciences, Inc: Gilead (GILD) Stock Looks Set For A Bounce)
Gilead stock has underperformed the market this year, generating a negative 26% return compared to 7.7% returns of the S&P 500. However, the recent decline has also compressed its valuation multiples. Gilead stock is now trading at an attractive valuation. The stock is currently trading at a PE (ttm) of 6.89 and a PS of (ttm) of 3.11. The current multiples are lower than its historical average and also its peers.
While there has been a slowdown in growth recently, the company has a strong pipeline of drugs which will drive its future growth. The stock is currently yielding 2.55%, which is higher than the current yield of S&P 500. And considering Gilead's strong balance sheet and cash flows, the dividends are likely to remain stable even if we don't see an increase. The consensus Wall Street price target is $95.74 which indicates a 26% upside potential. Gilead stock is a good buy for income investors.