Do you want to increase passive income? Buy this Dow Jones stock

Do you want to increase passive income?  Buy this Dow Jones stock
Do you want to increase passive income?  Buy this Dow Jones stock

Investors achieve financial independence when the passive income (such as dividends and interest) their holdings generate exceeds their expenses. Getting to that point is easy in theory. It boils down to owning enough dividend-paying stocks with a track record to deliver inflation-beating dividend growth year after year. But which companies will help you achieve this?

To start the idea generation process, it can be useful to talk about a stock that undoubtedly already meets this requirement and what characteristics it possesses. The pharmaceutical company Amgen (AMGN -1.11%) is just such a stock. It is a relatively recent addition to the list of stocks that include Dow Jones Industrial Average (Added in 2020). And the addition was well justified.

Let’s take a closer look at Amgen’s fundamentals and valuation to understand what makes it an excellent dividend growth stock.

Amgen had decent results for the quarter

In the 43 years since it was founded, Amgen has focused on developing medicines that help fight diseases such as cancer and osteoporosis. The company’s medicines are prescribed to millions of patients in over 100 countries and territories worldwide each year. Amgen’s market capitalization of $125 billion positions it as the ninth largest drugmaker on the planet.

In the fourth quarter, the drugmaker’s total revenue fell 0.1% year over year to $6.8 billion. Amgen’s total product sales in the 4th quarter increased 4.5% year over year to just $6.6 billion, which was the result of 10% product volume growth. Double-digit volume growth in the osteoporosis drugs Prolia and Evenity and the oncology therapy Kyprolis more than offset the volume decline in the immunology drug Enbrel.

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With some drugs (such as Enbrel) facing pricing pressure from competitors, the average net sales price fell 3% year over year. Headwinds against exchange rates adversely affected product sales by 2 percentage points. Finally, a sharp drop in demand for the COVID-19 antibodies that the company was producing for Eli Lilly caused the “other income” segment to halve to $287 million in the fourth quarter. Together, these three factors are the reason why Amgen’s total turnover was essentially unchanged from year to year.

The company’s non-GAAP (adjusted) diluted earnings per share (EPS) fell 7% year over year to $4.09 during the 4th quarter. Amgen’s non-GAAP net margin fell 410 basis points over the year to 32.2% for the quarter. But this reduced profitability was partially offset by a 4.6% reduction in the company’s weighted average diluted share count.

A doctor examines a patient with a stethoscope.

Image source: Getty Images.

Revenue and growth should improve for Amgen

Looking ahead, Amgen’s future is bright. Thanks to dozens of compounds in its pipeline currently in clinical development, analysts expect the company’s adjusted diluted EPS to grow 4.1% annually over the next five years. And this conservative earnings growth estimate is not far below the drugmaker average of 6.3%.

Amgen boasts a whopping dividend yield of 3.5%, which is well above the Dow Jones Industrial Average’s average yield of 2.04%. Additionally, the company’s quarterly dividend per share has skyrocketed over the past decade (from $0.47 per share per quarter to $2.13, a 353% increase). And if that wasn’t enough to convince income investors of Amgen’s quality as a dividend growth stock, similarly robust dividend growth is poised to continue.

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That’s because Amgen’s dividend yield will clock in at around 47% this year. That suggests the company has the funds necessary to complete bolt-on acquisitions, execute share buybacks and reduce its debt load while steadily increasing its dividend annually.

The valuation makes Amgen’s share a buy

Amgen is a fundamentally great company. And with the current share price at $241, the valuation isn’t too bad either.

The stock’s forward price-to-earnings (P/E) ratio of 12.6 is moderately lower than the average forward P/E ratio of 14 for the drugmaker. This reasonable valuation solidifies Amgen’s buy case for dividend growth investors.

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