1 Top Dividend Growth Stock to Buy Right Now

Key Points

• Amgen is dealing with the threat of several fast-approaching patent expirations.

• The biotech can overcome this headwind thanks to new internally developed products and acquisitions.

• The drugmaker's dividend streak is impressive, and the stock is trading at reasonable levels.

• 10 stocks we like better than Amgen ›

Generating passive income is great for investors, and holding dividend-paying stocks is an excellent way to do that. However, not all corporations that pay dividends will be attractive to income seekers.

Some may need to cut or suspend their payouts due to various headwinds, while others don't make increasing their payouts a priority, even when their underlying operations are robust. Income-focused investors should look for reliable businesses with capital allocation strategies that prioritize payout hikes. Amgen (NASDAQ: AMGN) meets these criteria.

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The patent cliff problem

Pharmaceutical companies are given extended patent protections on their products for a good reason. Significant upfront investments are required to discover and develop new clinically useful compounds from the early stages of development through the clinical trial process and then to regulatory approval and the marketplace. Plenty of promising candidates don't make it that far.

Drugmakers would be far less likely to invest in the development of drugs if, once they earned regulatory approval, any of their rivals were immediately free to launch a generic or biosimilar version. The patent protection system helps foster innovation -- but those protections don't last forever.

Image source: Getty Images.

Amgen, a longtime biotech leader, has dealt with expiring patents before, and it will again for several of its products by the end of the decade, including the immunosuppressants Otezla and Enbrel. While those two are biologic drugs, which can be harder to functionally replicate than small-molecule drugs, they are expected to face biosimilar competition in the U.S. by 2028 and 2029, respectively. And by next year, the company's cancer medicine denosumab -- a monoclonal antibody treatment sold under the brand names Prolia and Xvega -- will too.

Last year, these products collectively generated about $12 billion in sales, accounting for approximately 36% of Amgen's $33.4 billion in total revenue. That's not an insignificant amount of revenue at risk, and it partly explains why in November, Amgen's stock price fell after it announced positive but mixed data from a phase 2 trial of MariTide, an investigational weight management medicine. The market had been hoping for a clear sign that MariTide could become a replacement player in Amgen's portfolio, with the potential to fill a piece of the anticipated revenue gap -- but it didn't get it. Still, Amgen has taken steps to address looming sales troubles.

Amgen's solution

In 2023, Amgen completed its acquisition of Horizon Therapeutics, a smaller biotech company, for about $28 billion. That deal expanded its lineup, reducing its exposure to medicines like Enbrel that will soon be drags on its revenue and earnings growth. It also granted Amgen access to new growth drivers, most notably, Tepezza, which was the first drug approved by the Food and Drug Administration for thyroid eye disease.

Since acquiring this medicine, Amgen has been working diligently, leveraging its larger industry footprint and greater financial resources to market Tepezza and pursue regulatory approvals in other countries, including Brazil and Japan. Tepezza's patent exclusivity won't expire until 2039, so it could be a sales growth driver for Amgen for a long time.

Furthermore, the biotech can expect its pipeline to deliver further clinical and regulatory successes. Recently, Amgen reported positive phase 3 trial results for bemarituzumab, a potential therapy for gastric cancer, which causes some 650,000 deaths annually, making it the fifth-leading cause of cancer death worldwide. There is a high unmet need in this indication, and bemarituzumab could help fill it, so the company's shares jumped on the heels of its phase 3 data announcement.

Moreover, Amgen's treatment pipeline features several dozen candidates, some of which are likely to be approved. There's also room for label expansions for many of its already-approved drugs. Even MariTide could carve out a small niche in the fast-growing anti-obesity space. Although it may not challenge the market leaders based on its efficacy alone, MariTide is administered once monthly versus once a week for the currently approved options. That more convenient dosing schedule should attract at least some patients.

Lastly, several of Amgen's existing medicines, including asthma treatment Tezspire and Repatha, which is used to lower cholesterol, should continue driving strong top-line growth.

The dividend looks safe

Amgen has a terrific dividend track record. It first issued a payout in 2011, and management has since expanded it substantially. The dividend has been increased by 201.3% in the past decade alone. At the current share price, it boasts a forward yield of more than 3.2%, whereas the S&P 500's average yield is a modest 1.3%. Amgen's cash payout ratio is 46.5%, leaving management ample room to increase the dividend further. And to sweeten the deal, the company's shares look reasonably valued right now.

Amgen's forward price-to-earnings is around 14, compared to the healthcare industry's average of 16.3. With a robust business that generates consistent financial results, a strong pipeline that should help it overcome the sales headwind of patent expirations, and an attractive dividend-growth streak, Amgen looks like an excellent pick for income-seeking investors.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amgen. The Motley Fool has a disclosure policy.