High-quality dividend growth stocks tend to be fantastic long-term investments. After all, it takes a special kind of business to be able to pay out ever-larger dividends for years on end.

So it shouldn’t be a surprise to see that many dividend growth stocks represent equity in world-class businesses. These are truly some of the greatest companies in the world. But there are degrees of greatness. And some companies, while great, might be not quite as great as others.

Today, I’m going to pit two great dividend growth stocks up against one another – it’s Bristol-Myers Squibb (BMY) versus Amgen (AMGN).

Seeing which one comes out on top could reveal the better long-term investment. Ready? Let’s dig in.

Bristol-Myers Squibb is a global biopharmaceutical company with a market cap of $149 billion. Amgen – is a global biotechnology company with a market cap of $138 billion. They’re not exactly the same business, but they’re both major drug companies with similar market caps. And I’m going to pit them against each other in three head-to-head rounds.

The first round will be fundamentals. The second round will be qualitative aspects like competitive advantages and risks. The third and final round will be valuation.

Whoever wins the most rounds wins the battle. Regarding fundamentals, we’re going to take a look at dividend metrics, business growth, profitability, and balance sheet strength. Who’s got the best fundamentals? Bristol-Myers Squibb or Amgen? Let’s find out.

Round 1: Fundamentals

Dividend Metrics

First, dividend metrics. They both have the same yield, at right about 2.9%. They’ve also both been increasing their dividends for almost the same exact length of time – 12 years for Bristol-Myers Squibb versus 11 years for Amgen.

Amgen, however, has the much higher five-year dividend growth rate – 15.2% compared to Bristol-Myers Squibb’s 4%. While Bristol-Myers Squibb’s most recent dividend increase of almost 9% shows a nice acceleration in dividend growth, Amgen’s most recent dividend raise of 10% was even higher. Bristol-Myers Squibb has the lower payout ratio based on adjusted EPS, but Amgen’s payout ratio looks better even on straight GAAP numbers.

I’m giving Amgen the very slight edge here on the dividend, based purely on a higher and more consistent growth rate.

Business Growth

Moving on to business growth, Amgen squeaks out another small victory. Bristol-Myers Squibb has compounded its EPS at an annual rate of 12.91% over the last decade- and that’s even after using a more favorable adjusted EPS number for FY 2020. On other hand, Amgen still beats them, even on a pure GAAP basis, with a 10-year EPS CAGR of 13.18%. Bristol-Myers Squibb does have more revenue growth, but that’s because of its massive Celgene acquisition. Amgen is simply growing faster as a business, which is why the dividend has grown faster.

Amgen is starting to pull ahead.

Profitability

But what about profitability? Over the last five years, Amgen has averaged annual net margin of 28.15% and annual return on equity of 42.89%. Over the last five years, Bristol-Myers Squibb has averaged annual net margin of 10.72% and annual return on equity of 16.07%. Amgen crushes them here. Both are highly profitable and impressive enterprises, but Amgen is more so.

Balance Sheet

That said, I give the balance sheet strength to Bristol-Myers Squibb. Their long-term debt/equity ratio of 1.28 beats Amgen’s 3.5. And their interest coverage ratio in FY 2018 – the last full year before the Celgene acquisition – was over 30. Amgen’s interest coverage ratio is over 7.
I’m giving this round to Amgen. But just barely. And it’s mostly based on slightly faster growth.

Round 2: Qualitative Aspects

Let’s start round two.

Regarding qualitative aspects, I see this as a close matchup. They’re very similar business models with very similar competitive advantages and risks. But I see one big difference. It’s in their product concentration. Amgen has more breadth, which reduces patent cliff risk. There’s less reliance on any one drug. Bristol-Myers Squibb’s top three drugs account for almost 70% of sales. Amgen’s top three drugs account for about 40% of sales.

I’m giving the second round to Amgen. But what about valuation? Can Bristol-Myers Squibb eke out a round and finish strong?

Round 3: Valuation

I see Amgen as the slightly superior business. And so it deserves a higher multiple. However, the multiple difference might be large enough to sway investors toward Bristol-Myers Squibb instead.
Investors are clearly getting a cheaper stock with Bristol-Myers Squibb.

Amgen trades hands for a P/E ratio of almost 20 right now. That’s actually lower than its own five-year average. And it’s a lot lower than the broader market’s multiple. So I do think Amgen is a very worthy long-term investment here.

However, Bristol-Myers Squibb’s P/E ratio, based on the midpoint for this fiscal year’s non-GAAP EPS guidance, is less than 9. Now, this is comparing GAAP to non-GAAP earnings. And it’s TTM versus forward projections. Still, the delta is large. If we want to bypass the tricky earnings comparison, the P/CF ratio for Bristol-Myers Squibb’s stock is under 11. Amgen’s P/CF ratio is 13.4.

Again, Bristol-Myers Squibb is just plain cheaper. Deservedly so, in some ways. But one could also argue the difference is too much based on pretty similar 10-year bottom-line growth rates.
While Bristol-Myers Squibb takes the last round, Amgen won the first two rounds. We’ve got a 2-1 score for Amgen.

That said, both are high-quality, investable, and buyable big pharma companies that will likely do very well over the long run. I’d be happy with either one – or, better yet, both. One might want to tilt toward Amgen, just based on overall quality and growth, but both could make a lot of sense for long-term dividend growth investors.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

Fed's Stealthy Move Could Crash U.S. Market [sponsor]
A new, secretive move being carried out by the Fed that has nothing to do with lowering or raising interest rates... could soon have an enormous impact on your wealth. According to Dan Ferris, the banking expert who once predicted the collapse of Lehman Brothers, "Millions are about to be blindsided." More here.