There are many positive things about it Bristol Myers Squibb (NYSE: BMY) and its stock. It has a pretty high dividend yield, it’s one of the largest pharmaceutical companies in the world and it makes dozens of life-saving drugs, with more to come from the pipeline. It won’t go bankrupt in the near future.
But I wouldn’t touch the stock with a 10-foot pole right now, even though I’ve recommended it to some investors in the past, and even though it could be a good choice in the future. This is why.
These will be some deep cuts
The first reason why Bristol Myers Squibb stock is a no-go right now is that it was in for a nasty surprise for investors in its first quarter earnings update. While it reported in February that non-GAAP diluted earnings per share (EPS) for 2024 would be as high as $7.40, it has dramatically revised down that estimate to a ceiling of just $0.70.
In addition, the company has claimed in the past that it expected its other income or expense category to post a profit of $250 million. It now says it will lose $250 million instead – a swing of $500 million. As if that weren’t enough, the effective tax rate, set at 17.5% for 2024, is now expected to be as high as 69%. The culprit for all these adverse changes is the recent acquisitions of Karuna Therapeutics and iRayzeBio, a pair of biotech companies, which will not cause similar problems in the future.
It is unclear whether investors were warned strongly enough about the possibility of these effects. But their focus is likely elsewhere, as Bristol Myers has also announced a new strategic productivity initiative that management says will save $1.5 billion annually by the end of next year. The catch is that some of the pipeline programs will likely get the ax, along with many workers. The cost savings will be invested in new growth initiatives.
It is not surprising that a company makes major acquisitions and shortly afterwards announces cost savings. The idea will be to reduce the number of layoffs in relation to the use of the new assets. The problem is, there isn’t exactly much for shareholders to look forward to these days.
There’s no compelling reason to buy it right now
Looking at Bristol Myers’ pipeline and upcoming catalysts, growth is unlikely to accelerate much. Management only expects a “low single digit result”. [percentage point] This year an increase in turnover is planned. The country also plans to pay off about $10 billion of its debt over the next two years.
Considering that the country currently has more than $51 billion in long-term debt, paying back that amount will make a significant dent. But it won’t be able to stop there, and because earnings growth is anemic, there won’t be much excess capital to divert to investors in the form of share buybacks and dividends. Expect more money to be funneled into deleveraging than into growth, even with the cost cuts, and expect the deleveraging process to take as long as the rest of the decade.
With a setup like that, there simply isn’t much reason to buy shares of this company today. With a payout ratio of almost 60%, the company probably won’t have to stop paying its shareholders, but as mentioned earlier, there won’t be much room for them to get a raise. So unless you desperately need a stock that is heavily in debt and growing slowly, look elsewhere.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool holds and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.
1 Stock I Wouldn’t Touch With a 10-Foot Pole was originally published by The Motley Fool
