3 Reasons to Buy Bristol Myers Squibb Stock

Bristol Myers Squibb (NYSE: BMY) shares have gone nowhere over the past few years. Why? The scariest two words in the pharmaceutical industry: "patent cliff." Just two medications -- Eliquis and Opdivo -- accounted for over $24.4 billion in sales last year, roughly half of total revenue. Market exclusivity for both drugs in the United States expires in 2028. At that point, the market will open, allowing lower-cost competitors to erode those sales.

The patent cliff creates a hole that the drugmaker must fill, and then some, if it wants to continue to grow. In that sense, it's hard to blame the market for growing skittish about the stock. But doubt and uncertainty can create opportunity. Here are three reasons to consider buying Bristol Myers Squibb shares like there's no tomorrow.

Image source: The Motley Fool.

1. It has a revamped drug portfolio and pipeline

Fortunately, pharmaceutical companies can see patent cliffs from miles away. Bristol Myers Squibb has been preparing for this moment by investing in its pipeline, both organically and through acquisitions. The company has 50 compounds in development and aims to deliver 10 new medicines by the end of the decade.

Cobenfy is the most important. Already approved to treat schizophrenia, it has immense commercial potential if it wins approval for treating psychosis associated with Alzheimer's disease. A crucial readout from its phase 3 Adept-2 study is due out later this year. In a partnership with Johnson & Johnson, Bristol Myers Squibb is also developing Milvexian, a new anticoagulant for atrial fibrillation that could help offset lost sales from Eliquis; that drug is also undergoing phase 3 studies.

There are also approved drugs that are still ramping up. Sales of Camzyos grew 97% year over year in the first quarter to $314 million, Breyanzi grew 56% to $411 million, and Reblozyl grew 16% to $555 million. Overall, the drugs in Bristol Myers Squibb's growth portfolio grew sales by 12% in the first quarter, offsetting a 6% decline from legacy products, bringing companywide growth to 3% that quarter.

Bristol Myers Squibb will need to put more pipeline wins on the board, and it would be a big setback if Cobenfy's indication for Alzheimer's psychosis fails. But the pieces are in place for the company to fill the sales gap created by its coming patent cliff.

2. Its 4.6% dividend is well funded

Of course, investors will have to wait and see how the pipeline matures over the next couple of years. The good news is that the stock will pay you to wait. Bristol Myers Squibb pays a dividend that yields a very generous 4.6% at the current share price. Despite the high yield, the company earns more than enough to pay shareholders: The dividend is currently only 40% of the company's 2026 earnings estimates.

That's an enormous margin of safety. If sales of Eliquis and Opdivo disappeared overnight, cutting Bristol Myers Squibb's earnings in half, the company could still afford its payouts. So you're getting paid a juicy, well-funded dividend while you wait for new products to fill that eventual sales gap.

3. The stock is cheap

Are there risks to investing in Bristol Myers Squibb? Yes. But the market has discounted the stock accordingly. I wouldn't be touting it if it traded at a price-to-earnings (P/E) ratio of 25, because there would be far more downside risk than potential reward if something went wrong. But the stock doesn't have a P/E of 25; it trades at only 8.5 times its 2026 earnings estimates.

I like to frame valuations as the market's way of setting expectations; a high valuation translates to high expectations. Bristol Myers Squibb's low valuation is the market's signal that it doesn't expect much growth. That may be fair if the company can't bring new drugs to market as it hopes to. But I think eking out mid-single-digit earnings growth through this patent cliff is enough to justify buying the stock now.

The stock's valuation could even remain at this low level indefinitely, and a smidge of growth could bring total annual returns into the high single digits because that 4.6% dividend provides such a high floor. If things go better than expected -- say Cobenfy hits a home run with Alzheimer's psychosis -- that low valuation would suddenly become a springboard to massive upside when Wall Street's sentiment improves.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.