Is the Gilead Sciences dividend safe?

Biotech giant Gilead Sciences (NASDAQ: GILD) has a lot going for it, including the company’s hefty 4.7% dividend yield. This compares very favorably to the average S&P500 yield of 1.4%. But there’s more to a dividend company than the yield it delivers. Arguably the most crucial factor for income-seeking investors to consider is the strength of a company’s operations.

There are other things to look at, including key financial ratios such as the cash payout ratio, which tells us how much of a company’s cash flow goes to its dividends. In this context, let’s consider whether the Gilead Sciences dividend is safe.

What’s going on with Gilead Sciences’ business?

Gilead Sciences has had great success in the COVID-19 therapeutics market with its antiviral Veklury. This drug has helped keep biotech revenues and profits afloat for the past two years. Elsewhere, Gilead Sciences remains a market leader in HIV therapies. These two activities are currently the most important for Gilead Sciences.

Gilead Sciences’ revenue jumped 3% year-over-year in the first quarter to $6.6 billion. The company’s adjusted earnings per share rose 4% year over year to $2.12. Veklury sales were up 5% year-over-year to $1.5 billion, while Gilead Sciences’ HIV franchise saw sales of $3.7 billion, or about 2% more than a year ago. The company is still grappling with the loss of exclusivity for some of its HIV products, including Truvada.

Truvada’s sales fell 72% year-over-year in the first quarter to $38 million. On the other hand, some of Gilead Sciences’ important anti-HIV products continue to move forward. Biktarvy’s sales jumped 18% year over year to $2.2 billion during the period.

Gilead Sciences hoped new approvals would offset the losses it is incurring due to patent cliffs, but things did not go as planned for the biotech giant. In March, the US Food and Drug Administration (FDA) refused to approve the company’s lenacapavir. The agency cited compatibility issues with the vial proposed by Gilead Sciences that would contain the lenacapavir solution. Gilead Sciences is confident it can work things out with the FDA.

Lenacapavir would be an important approval for the company as it would become “the first six-month long-acting subcutaneous injection available for the treatment of HIV.” Above all, Gilead Sciences has a pipeline full of potential HIV therapies. In my opinion, there is a good chance that lenacapavir will eventually get approval. Gilead Sciences will record other major regulatory milestones in this therapeutic area over the next five years.

How long will the company continue to benefit from its work related to the coronavirus? Veklury has remained a crucial COVID-19 treatment even as newer, more contagious variants of the virus have taken over and competing therapies have become popular. The pandemic is not over; even when officially over, COVID-19 could become endemic. Veklury might falter if the outbreak ends, but he probably won’t stop contributing to Gilead Sciences’ revenue, at least not for a few years.

Over the long term, I see the underlying business of Gilead Sciences remaining strong as it delivers regulatory gains in HIV and other therapeutic areas.

A superior dividend stock

In addition to its juicy 4.7% yield, Gilead Sciences boasts a cash payout ratio of 36.5%. For reference, less than 60% is generally considered “good.” Gilead Sciences’ payout ratio shows that the company has plenty of room to continue increasing its dividends, which it is used to. The company has increased its payouts by 40.4% over the past five years. This is an average increase of more than 8% per year.

Gilead Sciences is not for investors looking for high growth stocks, but for those looking for income, it seems like a great target. And in addition, the company seems reasonably valued. Gilead Sciences’ forward price-to-earnings ratio of 9.5 is below the biotechnology industryaverage of 11.2. Dividend- and value-oriented investors looking for a stable, blue-chip company need look no further.

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Prosper Junior Bakiny has no position in the stocks mentioned. The Motley Fool fills positions and recommends Gilead Sciences. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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