Why Bristol Myers Squibb Stock Isn't Nearly As Cheap As It Looks

Bristol Myers Squibb (NYSE: BMY) is a well-respected pharmaceutical company. Technically, it was created in 1989 through the merger of two other companies, but both of those businesses were founded in the 1800s. It is a proven survivor that clearly knows how to navigate the highly complex and competitive drug industry. And the stock looks cheap today. But is it really as cheap as it looks?

Bristol Myers Squibb's value appeal

Bristol Myers Squibb's price-to-earnings ratio is currently sitting around 16x. That's well below the S&P 500's (SNPINDEX: ^GSPC) 27x and the pharmaceutical industry's 24x average. Meanwhile, Bristol Myers Squibb's dividend yield is a highly attractive 4.4%. By comparison, the S&P 500 index has a yield of 1.1%, and the average drug maker's yield is around 1.7%.

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It would be understandable if value investors jumped aboard. For dividend investors attracted to the lofty yield, the company's 70% payout ratio is a bit high but not unreasonably so. Still, you should ask yourself why the company looks attractively priced before you buy it.

The fly in Bristol Myers Squibb's ointment

Bristol Myers Squibb isn't likely to go out of business anytime soon. If your investment horizon is decades long, you may want to own this stock today, given its attractive valuation metrics. However, you'll have to be prepared for some uncertainty through at least the end of 2028. That's because the company has key drugs with upcoming patent expirations. Revlimid and Pomalyst, both cancer drugs, will get hit in 2026, and cardiovascular drug Eliquis, which is marketed with competitor Pfizer (NYSE: PFE), is set to face generic competition in 2028.

To be fair, the company has been working on its drug pipeline. But research and development don't work on a timeline, while patent expirations do. There could be a timing mismatch that leaves Bristol Myers Squibb's top and bottom lines under material pressure in the near term. So, the stock looks like it is a bargain, but there's a reason for the discounted price.

Bristol Myers Squibb is a long-term commitment

The pharmaceutical business is intensely competitive. Bristol Myers Squibb has proven it knows how to survive in the long term, and the price has some value and income appeal today. However, it may not be as cheap as it seems when you factor in near-term patent headwinds. If you are hoping to make a quick buck, you should probably look elsewhere.

That said, if your plan is to hold the stock for decades, Bristol Myers Squibb may still be worth buying. After all, it is probably better to buy a good company at an attractive price than to try to time the bottom with every purchase, which is a virtually impossible task to do consistently.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb and Pfizer. The Motley Fool has a disclosure policy.