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Viatris Inc(VTRS-Q)

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Is Viatris Stock Good for Dividend Income?

Motley Fool - Wed Aug 9, 2023

Viatris (NASDAQ: VTRS) is a stock of immense interest among the dividend investing community, and it's no surprise why. Generic drugmakers, when operating smoothly, can be veritable cash machines for years on end.

But as all investors should know, companies don't always live up to the promise of their archetype. So let's take a closer look at Viatris and judge its suitability for dividend income to see if you might want to add it to your portfolio.

The points in favor

Right off the bat, investors should notice that Viatris has all the makings of an ideal dividend stock. Its line of business, manufacturing branded and complex generic medications that have large and established markets, is one that is inherently stable. With all else being equal, people tend to prefer buying cheaper medicines when they're able to, and once they're taking a drug to manage a chronic condition, they're reliable contributors to demand for years.

As an example, some of Viatris' brands like Lipitor, Zoloft, and Neurontin are household names, and they're all indicated for ongoing dosing, which equates to ongoing accrual of recurring revenue. In 2022, Viatris brought in just over $2 billion in net income. Plus, most medications aren't optional, so in the event of economic downturns, the company is insulated from pullbacks in consumer demand.

But that's not all. Its dividend yield of 4.5% is quite good in comparison to the market's average forward dividend yield of 1.5%. It hasn't been an independent entity for long enough to have a strong history of dividend growth, as it separated from Pfizer in late 2020. But management continues to signal that hiking the payout and returning capital to shareholders via buybacks will be a priority as the company advances its strategic expansion plans over the next few years.

Finally, Viatris' shares are valued inexpensively at the moment, with a price-to-earnings (P/E) ratio under 7. That doesn't put more money in your pocket as a dividend investor, but it does provide a measure of confidence that buying this stock is a more efficient use of your capital compared to pricier options. Furthermore, in the event that its growth picks up in the coming years, there's a chance that it'll experience valuation multiple expansion as the market adjusts its expectations about the pace that new earnings will trickle in. And that'd be good for shareholders.

The points against

There are a few issues that investors need to appreciate before buying Viatris for dividend income. Most importantly, commercializing generic medicines is an inherently low-growth business, and there are a few risks that are hard to guard against that can slow growth to a crawl.

By definition, generic medicines no longer have manufacturing exclusivity protections that recently developed branded medicines have. That means it's incredibly hard to defend market share as competitors can simply produce the drugs on their own and perhaps sell them more cheaply. Furthermore, while some generics might be better sellers than others, they're also forced to compete directly with newer products that may be more effective, albeit more expensive to purchase.

So it's possible for a reliable moneymaker to get one-upped by a new entrant to the market. And that's part of the reason why Viatris' revenue only grew by 1% after accounting for divestiture activity in Q2 of this year, reaching $3.9 billion.

Then there's the company's debt load of just over $17 billion. Although the company has succeeded in reducing its total debt from its high point of more than $25 billion in Q4 of 2020, further deleveraging is on the agenda. Expect debt pay-down to continue to be a drag on growth for at least a few more years.

Should you buy the stock?

Given its stable business model, low valuation, high-ish dividend yield, progress with debt repayment, and a payout ratio of around 30%, Viatris will almost certainly be able to continue paying its dividend at the current rate or higher for the foreseeable future. Despite the ongoing exposure to the risks outlined above, it will probably be able to continue commercializing new drugs in a way that's consistently thinly profitable too. There aren't major risks looming to sweat about, which is also a plus.

At the same time, Viatris might not see much share price appreciation owing to the fact that the demand for generics is not going to go wild anytime soon. And it isn't likely to beat the market, but dividend investors shouldn't care too much about that. Viatris is a good stock to buy for dividend income, so long as you can accept that it will never go to the Moon.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Pfizer. The Motley Fool recommends Viatris. The Motley Fool has a disclosure policy.

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