Investors have been treading carefully around big pharma stocks, except a few like Eli Lilly and Novo Nordisk, the makers of weight-loss medications Zepbound and Wegovy, respectively. The high-risk nature of the pharmaceutical industry, which relies on the successful launch of new drugs to offset the effects of patent expirations, has made investors increasingly cautious.
This caution is evident in the market performance of many big pharma stocks, which have lagged behind the S&P 500 over the past 20 years. However, this underperformance has opened up some potentially attractive investment opportunities.
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One such opportunity is Bristol Myers Squibb(NYSE: BMY) (BMS), a top-tier U.S. biopharmaceutical company. BMS' shares are currently undervalued based on several valuation metrics, and the company has a strong history of innovation. Additionally, it offers an enticing dividend yield of 4.97%.
But how does BMS stock compare to the popular Vanguard S&P 500 ETF (NYSEMKT: VOO)? This exchange-traded fund (ETF) provides a cost-effective way to invest in 500 of the largest U.S. companies in the market. It's also often used as a benchmark for the U.S. stock market, has consistently delivered strong performance, and represents a core holding for many investors.
Does BMS' bargain basement valuation and generous dividend yield make it a better buy than the Vanguard S&P 500 ETF? Let's dig deeper to find out.
BMS vs. The Vanguard S&P 500 ETF
BMS stock is currently trading at 6.9 times forward earnings, a stark contrast to the average forward-looking price-to-earnings ratio of 17 within its big pharma peer group. When compared to the broader market, represented by the S&P 500 which trades at over 20 times forward earnings, BMS stock also appears to be a bargain.
Moreover, BMS offers a dividend yield of 4.97%, one of the highest in the large-cap biopharmaceutical industry. This yield significantly exceeds the average yield of 3% within its peer group and the S&P 500's average yield of 1.35%.
Why is BMS stock trading at a sharp discount relative to the broader market and its big pharma peer group? Investors are deeply concerned about the company's ongoing portfolio churn.
BMS recently lost exclusivity for its megablockbuster cancer medication, Revlimid, and is slated to lose patent protection for several additional drugs, including Opdivo and Eliquis, later this decade. This portfolio churn could diminish the pharma company's earnings power over the balance of the decade.
The Vanguard S&P 500 ETF, for its part, trades at approximately 26 times trailing earnings, well below its 10-year average of 33.7. Still, this Vanguard ETF does trade at a sizable premium relative to BMS stock.
The Vanguard S&P 500 ETF boasts an ultra-low expense ratio of 0.03%, a decent yield of 1.3%, an average earnings growth rate of 13.9%, and a high degree of diversification within the large-cap U.S. stock landscape.
This S&P 500 indexed fund also provides exposure to several potent themes like artificial intelligence, novel weight loss medications, and cloud computing.
The Verdict
BMS is an undervalued high-yield dividend stock. However, the company's shares don't leap off the page as a potential market-beater. BMS will have to overcome the negative investor sentiment toward major drug manufacturers and its patent cliff to outperform the S&P 500 this decade. That's a tall order.
As such, investors are probably better served by buying the Vanguard S&P 500 Index Fund than this potential bargain. The fund offers a more diversified and less risky investment option, albeit at a substantially higher valuation.
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George Budwell has positions in Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Bristol Myers Squibb and Vanguard S&P 500 ETF. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
