There are many positive things about Bristol Myers Squibb (NYSE: BMY) and its stock. It has a decently high dividend yield, it’s one of the world’s largest pharmaceutical companies, and it makes dozens and dozens of life-saving medications, with even more to come from its pipeline. It won’t be going out of business anytime in the foreseeable future.
But I wouldn’t touch the stock with a 10-foot pole right now, even though I’ve recommended it for some investors in the past, and even though it could well be a decent pick in the future. Here’s why.
These will be some deep cuts
The first reason why Bristol Myers Squibb stock is a no-go right now is that in its first-quarter earnings update, it had a nasty surprise for investors. Whereas in February it reported that its non-GAAP diluted earnings per share (EPS) for 2024 would be as high as $7.40, it revised that estimate dramatically downward to a ceiling of just $0.70.
Furthermore, in the past, it claimed that it was anticipating its other income or expenses category to register a gain of $250 million. It now says it’ll be losing $250 million instead — a swing of $500 million. As if that weren’t enough, its effective tax rate, penciled in at 17.5% for 2024, is now expected to be a whopping 69%. The culprit for all of these unfavorable changes is its recent acquisitions of Karuna Therapeutics and iRayzeBio, a pair of biotechs, which won’t cause any similar problems in the future.
It’s unclear whether investors were warned forcefully enough about the possibility of these effects. But their attention is probably elsewhere, as Bristol Myers also announced a new strategic productivity initiative that management claims will save it $1.5 billion annually by the close of next year. The catch is that some of its pipeline programs will probably be getting the axe, along with many employees. The cost savings are set to be invested in new growth initiatives.
It isn’t too strange for a company to make major acquisitions and then shortly thereafter announce cost cuts. The idea will be to reduce redundancies relative to using the new assets. The trouble is, there isn’t exactly too much for shareholders to look forward to these days.
There’s no compelling reason to buy it at the moment
Looking at Bristol Myers’ pipeline and its upcoming catalysts, its growth is probably not going to pick up speed very much. Management expects only a “low single-digit [percentage point] increase” in the top line this year. It’s also planning to pay down around $10 billion of its debt over the next two years.
Given that it currently holds more than $51 billion in long-term debt, paying back that sum will make a solid dent. But it won’t be able to stop there, and with its earnings growth anemic, there won’t be much in the way of excess capital to redirect to investors in the form of share buybacks and dividends. Expect more money funneled into deleveraging than growth, even with the cost cuts, and expect the deleveraging process to take as long as beyond 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 near 60%, it probably won’t need to stop paying its shareholders, but as mentioned previously, there isn’t going to be much room for them to get a raise. So unless you’re deeply needing a stock that’s heavily indebted and slow-growing, look elsewhere.
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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in 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
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