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Viatris Inc(VTRS-Q)

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Viatris Just Sold Off 3 Key Segments. Is It Still a Buy?

Motley Fool - Fri Oct 13, 2023

On Oct. 1, Viatris(NASDAQ: VTRS) made an announcement that's sure to shake up its fortunes. It's divesting nearly all of its over-the-counter (OTC) medicines, its entire women's healthcare segment, and its active pharmaceutical ingredients (API) manufacturing business in India.

So where does that leave the rest of Viatris' business? And do those sales help or detract from its prospects of being a good stock for dividend income with a splash of growth? Let's analyze in a bit more detail what's changing, and how much it matters for shareholders to find out.

Key moneymakers are staying on board

Per management, the point of the divestitures is to advance the company's strategic plan of reducing its debt load, which totals nearly $19 billion. The moves will also involve laying off employees (around 15% of its total workforce), and should generate about $3.6 billion in proceeds. Viatris has been looking for buyers for these segments since at least November of 2022. All of the sales and closures will be done by the end of the second quarter of next year.

The company didn't provide guidance regarding how much money it will save on an annual basis, or how much of an earnings hit it could be taking. Still, one thing is clear: Its revenue base is going to shrink. And since its trailing-12-month revenue already fell by 4% over the last 12 months to $15.6 billion, shareholders might be getting a little antsy.

But the impact might not be as much as they fear. Key medicines like Viagra won't be getting sold, nor will heavyweight contributors like Lipitor. In the first two quarters of 2023, Viagra brought in $226 million in sales on its own. None of the company's 10 highest-earning products are being sold off.

The divestitures are the final part of phase 1 of the company's plan. That involves rightsizing its operations, freeing up some leverage, cutting down on interest payments, and getting into a position where it can invest in generating more in growth while also returning more capital to shareholders.

The growth component of that process is already underway. Viatris plans to commercialize a handful of new generic medicines that are expected to bring in more than $500 million annually, with the first sales to begin before the close of this year.

Is the dividend safe?

Viatris' dividend, which presently has a forward yield of 5%, is not in any danger as a result of the divestitures. The business's payout ratio is only 31%, so its earnings could contract by quite a bit and it'd still have enough left over to keep returning cash to shareholders.

Overall, selling off those three segments does not scuttle the investment thesis for the stock. Nor does it imply a major change of strategy or portend more rapid growth in the near future. The market's reaction to the announcement was muted, which suggests that the impact on the company's future value is perceived as being limited.

Whether that proves true or not depends on the management team, and the ability of Viatris' pipeline to deliver lucrative generics to sell. If anything, investors should appreciate that management is willing and able to advance the strategic plan -- to reorient the company to its long-term state of slow and steady earnings growth and returning capital -- as advertised.

So is this stock still a buy? Yes, I believe it is. Just remember that it wasn't a growth stock before, and it won't be now either.

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

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