Stocks are in a tough spot. The yield on the 10-year Treasury note hasn’t been this high since January 2010. What this means is that most stocks — especially those on the higher-risk side of the spectrum — are considerably less attractive than risk-free assets such as T-bills.
Investors have definitely picked up on this fact. Speaking to this point, the iShares 7-10 Year Treasury Bond ETF has trounced the performance of higher-risk equities like biopharmaceutical stocks over the last 30 days.
IEF Total Return Level data by YCharts.
This hefty dip in risky biopharma stocks presents a golden opportunity for savvy investors. Eventually, the risk premium will undoubtedly tilt in favor of beaten-down biopharma equities over risk-free assets such as T-bills. It’s simply a matter of time.
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Which out-of-favor biopharma stocks are worth loading up on during this down period? Amgen (NASDAQ: AMGN), a blue chip dividend stock, has all the pieces in place to return to its winning ways once the risk premium flips back toward owning stocks over bonds. Read on to find out more.
Amgen: What’s behind the dip?
Amgen’s shares are presently down by 8.4% so far this year. The biotech pioneer has fallen out of favor with investors this year over pricing pressures on key legacy franchises, such as the white blood cell booster Neulasta, along with underwhelming sales for the Kras-mutant lung cancer drug Lumakras. The latter raked in $71 million in the fourth quarter of 2022, a figure that missed analysts’ estimates by a whopping 21%.
Investors also seem concerned that Amgen’s spate of recent acquisitions, such as Chemocentryx and Horizon Therapeutics, may not be accretive from either an earnings or top-line standpoint in the near term. Driving this point home, Amgen’s top and bottom lines might dip modestly this year, according to some analyst estimates.
The key concern is how the $28 billion Horizon acquisition will ultimately impact Amgen’s financials throughout 2023. The biotech will likely clarify this all-important issue once the deal officially closes in the second quarter of the year.
This biotech is undervalued and oversold
Why should investors ignore the noise and buy Amgen stock on this dip? Amgen, throughout the course of its operating history, has been a value-creating machine for shareholders. As a result of its proven ability to develop groundbreaking new medications ( such as the cholesterol treatment Repatha) and management’s dedication to paying an elite dividend, Amgen has clobbered so-called “risk-free assets” from a performance standpoint since going public in the summer of 1983.
IEF Total Return Level data by YCharts.
Where do things stand now? Amgen stock pays an annualized dividend of 3.57% at current levels, which is among the highest among its large-cap drug manufacturing peer group. Its dividend is also well covered by current operations, evidenced by the fact that management only used 47% of the company’s free cash flow to cover dividend payments in 2022.
Regarding valuation, Amgen stock is a downright bargain at these levels, based on its 7.9% earnings yield. The biotech’s earnings yield is modestly higher than the industry average (7.6%) and is well north of the 10-year Treasury yield of 3.57%.
All things considered, Amgen’s recent weakness comes across as a fantastic buying opportunity. After all, this top-shelf pharma company has proven it can overcome short-term portfolio headwinds to deliver outstanding returns on capital over the long run. Investors, in turn, shouldn’t hesitate to buy this beaten-down biopharma stock ahead of the eventual shift in risk dynamics between the bond and stock markets.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Spdr Series Trust-Spdr S&p Biotech ETF. The Motley Fool recommends Amgen. 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.
