Viatris(NASDAQ: VTRS) is a large and diverse pharmaceutical business that spun off from Pfizer in 2020. The company's medications are in 165 countries and much of its business centers around generic drugs. But while its operations are diverse, this isn't the type of enterprise that screams growth. Chances are, if you're considering Viatris for your portfolio, it's because of its dividend and low valuation.
With a 3.9% yield, the healthcare stock offers investors a higher payout than the S&P 500 average of 1.4%. It's also trading at just 4 times its estimated future earnings (based on analyst projections). Those are a couple of big incentives to own the stock. But with its earnings declining significantly last year, is this really a great dividend stock to own, or just a value trap?
Operating income fell by more than 50% in 2023
Viatris' latest earnings numbers should have investors a little concerned. Although revenue declined by 5% in 2023, the company also divested of some businesses in order to focus on therapeutic areas that it believes are core parts of its future: ophthalmology, gastroenterology and dermatology.
What is more concerning is that Viatris' operating profits, which come before other income, expenses, and one-time items, were down 53% to $766.2 million. The company's selling, general, and administrative expenses rose by 11% and its research and development costs jumped 22%. In addition, the drugmaker incurred $111.6 million in legal bills versus just $4.4 million in the previous year.
While Viatris has only provided guidance for earnings on an adjusted basis for 2024, it's expecting that its free cash flow will be around $2.5 billion at the midpoint, which is an encouraging sign, because that figure is better than the $2.4 billion in free cash it generated for 2023.
Is the dividend safe?
On an annual basis, Viatris spends about $580 million on its dividend payments. That suggests that its current dividend is sustainable. But the company is also carrying a lot of debt on its books, totaling $16.2 billion as of the end of last year, which was less than the more than $18 billion it had a year earlier.
Viatris is going to need to spend a lot of its free cash flow on paying down its debt; interest costs last year were significant at $573.1 million, representing 75% of its operating income. A year earlier, with stronger results, interest expenses were just 37% of the company's operating profits.
The dividend does appear to be safe, but investors may not expect much in the way of dividend increases because Viatris' financials haven't been all that great, and with high interest costs, the company is likely to prioritize improving its balance sheet over boosting its payout.
Is Viatris a good buy, or just a value trap?
Viatris is struggling to find ways to grow, and although it's cheap, this isn't a stock I'd rush out to buy. The low forward price-to-earnings multiple is based on analyst estimates that may change over time, which is why investors shouldn't become too reliant on that figure.
Its cheap valuation may be a big reason investors may feel compelled to buy the stock, and that could be a costly mistake. Given its disappointing financials and lack of growth, Viatris resembles more of a value trap than a great dividend stock.
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David Jagielski 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.
