Should You Buy Bristol Myers Squibb While It Trades Below 10 Times Forward Earnings?

Bristol Myers Squibb's (NYSE: BMY) price-to-forward earnings ratio is around 9.7x, which is slightly above its five-year average. However, pharmaceutical competitor Eli Lilly (NYSE: LLY) has a price-to-forward earnings ratio of 35.6x. Compared to that, Bristol Myers Squibb looks downright cheap. And, for investors who think long-term, it could be worth buying despite Wall Street's concerns about upcoming patent losses. Here's what you need to know.

There's nothing unusual happening with Bristol Myers Squibb

The reason why investors are so enamored of Eli Lilly is that it is leading in the new GLP-1 weight-loss space. In other words, it has a hot new product, which is the type of thing that excites investors. The reason why Bristol Myers Squibb's forward P/E is so much lower is that it is set to lose patent protection on blockbuster drugs Opdivo, for cancer, and Eliquis, which treats cardiovascular issues.

Image source: Getty Images.

That's bad news, since generic competition is likely to lead to a steep revenue decline for those two drugs. But it is important to understand that patent expirations are entirely normal in the pharmaceutical industry. Even Eli Lilly will eventually lose patent protection on its highly successful GLP-1 drugs. With a history dating back to the mid-1800s, Bristol Myers Squibb has been through this before and survived.

The timing doesn't always line up

The real issue is that new drug development doesn't always line up with patent expirations. And since Wall Street tends to be myopically focused on the short term, it will likely remain relatively downbeat on Bristol Myers Squibb until it has new drugs to replace its old ones. Rest assured, however, there are new drugs in the pipeline, including in the areas of cardiology and oncology.

If you can think long-term, Bristol Myers Squibb could be an attractive investment right now. Notably, it offers a well-above-market 4% dividend yield. With a dividend payout ratio of around 55%, it is well covered. (For reference, Eli Lilly's yield is only 0.5%.) And for those worried about a dividend cut, the company has a long history of dividend growth. When it last faced hard times, it held the dividend steady instead of cutting it. So if history is any guide, that's the most likely worst-case scenario this time around, as well.

Bristol Myers Squibb is paying you well to wait

If you want to own a Wall Street darling, buy Eli Lilly. If you don't mind buying while others are fearful, taking advantage of investors' short-term thinking, take a close look at Bristol Myers Squibb. And while you wait for the well-run drug maker to develop and market new drugs, you can happily collect its lofty 4% dividend yield.

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