Thursday, May 11, 2017

AMGN sticking to discipline with trepidation


Discipline is a tough slog when you can come up with several reasons why you would like to deviate from your strategy.  

In this post, I look at why Amgen, symbol AMGN, may not be the best fit for the 2017 portfolio and I explore the fundamental reasons why I added AMGN today. (5/11/2017)


  • What is the best alternative to breaking your investment discipline?
  • Is doing nothing with your cash the best alternative for the $100,000 I have to invest in 2017?
  • Buy this stock and you become over invested in pharma or biotech?
  • Wait for a different stock trading at half the price and by the end of the year you will not have enough holdings for a well-diversified portfolio.


Amgen, symbol AMGN,  meets all four of the basic criteria I used to pick every Dividend Machine in every portfolio.  Amgen also meets my most recently added criteria, revenue growth. 

To review:

Earnings must exceed dividends paid out; dividend yield should be 2.75% or greater to beat the 2 year U.S. Treasury, dividend growth has to exceed inflation and I desire a 4% or greater average annual dividend growth rate over the past three years, debt to equity (D/E) should be 1 or less or equal to industry average and the newest criteria, revenue needs to be growing.

If these criteria are so good and if this stock passes those hurdles, why the trepidation?

EXCESS CONCENTRATION IN ONE STOCK


What are the reasons I was hesitant to add AMGN to the 2017 portfolio.  One is the price of AMGN.  At $160 a share, 100 shares would be 16% of the money I will invest in 2017.   Some use a rule of 4%.  No single security should be greater than 4% of the value of the portfolio.   Another rule of thumb is you need only about 20 stocks to create a diversified portfolio which would suggest that with equal waiting each security would be 5%.   No rules say it is o.k. to have 16% of your portfolio in one holding.


SECTOR DIVERSIFICATION 


Another reason for my trepidation is that I have already bought Pfizer, symbol PFE for the 2017 portfolio.  I have not used “trying to achieve sector diversification” as one of my criteria so far and my portfolios are doing well.   So why start to deviate from your discipline you might ask? 


Close inspection of my portfolios shows the worst performing portfolio is the 2014 portfolio. In 2014 I picked only 17 stocks.  Energy makes up 25%: CVX and COP.  Total return of the entire portfolio in those 3.25 years is just over 20%.


We compare well with VIG which is an ETF that concentrates on dividend growth stocks and holds about 50 stocks. VIG actually did better on capital gains than either my portfolio or SDY and VIG’s total return in 2014 is about 20%.   But SDY the ETF that concentrates on dividend aristocrats and has about 100 stocks beat us both with a 28% total return; dividends made the difference.  See the table below.


My 2014 portfolio suffers, I believe due to too much investment in the energy sector.  Should I consider sector diversification or should I stick with my discipline?

STICKING TO DISCIPLINE

I pulled the trigger today and bought AMGN at $159.25.


stock chart

Amgen is a biotechnology company.  It was one of the first biotech companies to experiment with genetic manipulation.  Amgen has a huge footprint.  They operate in 100 countries.   

Their history goes back to the 1980’s when their discoveries were cutting edge.   This is a not a newly formed company with a momentum idea.  Let’s look at some of their strengths.


They sell no fewer than 16 medicines for hard to treat illnesses.   You can find those medicines by clicking on this link AMGEN Products.   

Clinical trials are what will drive the next group of products Amgen sells.  They have 33 pre-clinical and clinical targets with strong genetic support.

Biosimilar medicines round out their expertise.  All of this adds up to growing revenues at a reasonable price.

AMGN Dividend Machine Fundamentals


I am sticking with my basic criteria.   AMGN earned $10.53 and paid out $4.60 in dividends.  Their yield at $159.25 is 2.88%.  Dividend growth over the past 3 years is over 29% per year. You can go back to 2011 when this bio tech, in contrast with other bio tech companies, started dividend payments.  Note that AMGN’s dividend history does not include the period of major market disruption during the 2008-2009 period.


Debt to equity ratio, according to MSN Money is .98.  Industry standard is 1 so AMGN meets my criteria.  However, YCharts shows the most recent quarter D/E ratio is closer to 1.13.   

Revenues have increased by an average of 6.59% annually.  Yesterday AMGN reported and their earnings were a touch a light as compared with expectations.  Here is Zack's report.

Biotech major Amgen Inc. (AMGN - Free Report) reported first-quarter 2017 earnings of $3.15 per share, beating the Zacks Consensus Estimate of $3.00 by 5% and increasing 9% from the year-ago period. Higher operating margins offset a weak top-line performance to drive the bottom line.


See the table below for a summary of AMGN’s dividend machine fundamentals.



Stay tuned to see how this portfolio works out.  Every year I worry about how my most recent picks will perform and with patience, I have not been disappointed.

M* MoneyMadam
Disclosure:  Long AMGN