Is This Biotech’s 4.2% Yield Healthy?

As one of the elder statesmen of the biotech sector, Gilead Sciences (Nasdaq: GILD) doesn’t get the respect it deserves.

Often when investors target biotech stocks, they’re thinking about smaller companies that have few if any products on the market. But Gilead, which was founded 34 years ago, pays a dividend.

It’s hard to overstate how much Gilead has improved therapies or how many lives it’s saved.

Gilead’s medicines turned HIV from a death sentence to a manageable condition. And its drug Sovaldi cured hepatitis C. Globally, it is estimated that there are 58 million people who have hepatitis C, with 1.5 million new infections every year.

And Gilead’s drug remdesivir, marketed as Veklury, is used to treat COVID-19.

As a result of its effective medicines, the company generates tons of cash flow. But is it enough to continue paying a $0.71-per-share quarterly dividend in the future?

Gilead’s free cash flow hit a recent peak of $19.5 billion in 2015 before falling each of the next two years, settling around $7.5 billion in 2018. It has more or less stayed at that level since then, as you can see in the chart below.

Free cash flow of $7.5 billion is nothing to turn your nose up at, especially when it covers the dividend, but SafetyNet Pro likes to see cash flow grow – not decrease.

So Gilead loses points for its declining free cash flow. But if cash flow rises as expected in 2022, the penalty won’t be as severe, and the stock would likely get an upgrade.

The good news is that the lower cash flow still easily covers the dividend.

Last year, Gilead generated $7.5 billion in free cash flow while paying shareholders $3.5 billion, a payout ratio of 46%. In 2021, Gilead’s free cash flow is projected to be $7.6 billion – more than enough to pay and raise the dividend.

The biotech company has paid a dividend since 2015 and has raised its dividend every year.

Gilead’s declining cash flow over the past few years brings its SafetyNet Pro rating down, suggesting there is moderate risk of a dividend cut. But with its low payout ratio and a forecast of higher cash flow, I suspect we’ll see an upgrade to a lower risk rating in 2022.

Dividend Safety Rating: C

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