GILEAD: a lower price is the best medicine

 

Many investors have been showing their disappointment in Gilead share price. In fact, in the last 2 years GILD has gone nowhere but down.

In this short article, I will explain why this is good for long term investors.

My Reasons

1)Simple Math

Around 15 months ago, I bought few shares of Gild around 100$ price with a projection of 11$ earnings per share, well covering my condition of 10% FCF yield. Nowadays, the price is 78$ with similar earning projection, thanks to a strong share repurchase covering the decline in Harvoni revenue (it’s medicine for Hepatitis C). If I trust in the management I have the opportunity to have an even higher FCF yield from my investment.

2)Buying Back shares

So, if Gilead keep buying back shares to reduce the impact in Hepatitis price competition, the best that can happen is to have a lower price so more shares can be bought.

3)Dividend

On top, for a dividend investor, dividend is more than guaranteed (as it’s only 15% of the current profit), it’s higher than S&P average, and the opportunity for increase is extremely high. The more shares can be bought, the faster will be the dividend growth in the coming years.

4)Super Dividend opportunity

Management has spent up 10B$ a year on share repurchase and 2.5B$ in Dividend. If they decide to increase dividend by 50% and decrease share repurchase, we will have 3$ dividend almost 4% Dividend that for a pharma company is a unique opportunity. it will be only 3.7B$ dividend vs. 15B$ free cash flow, still very safe!!!!

5)Possible Dividend Growth

If the company keeps purchasing share at this pace and price stays this low, GILD could reduce its share number by 50% in 10 years, with the opportunity to keep raising Dividend faster without spending much more money. I won’t be surprise if the company pays more than 10$ a share dividend in 10 years time.

6)HIV growth

50% of Gild business is keep growing at interesting pace (around 15%) in 12 month time, while HCV will stabilize the HIV will be bigger and growing.

7)Pipeline

The current liquidity and cash generation give time and resources to its pipeline to develop its next blockbuster: NASH or more

8)Possible acquisition

The 24B$ cash available are more than enough to pursue an interesting acquisition. So far the management has been prudent in not wasting money with any deal but opportunities will always be at the door of a rich neighbour.

9)It could be bought

Crazy to say, but this prices with no debt why not buying directly all the company? With the current cost of debt, I will do any time even with 30-40% premium!

10)Successful history

Management proved to be very successful in the long term and company in 25 years grew from 90m$ to 100B$ (so more than 1000 times). I believe with a strong repurchase program and lower price for 2 more years we could multiply the investment by 10 times in 10 years.

11)Lower your purchase price

If you trust in the management and in few of the points above, today low price will give you the opportunity to reduce your purchase cost and increase your potential return.

 

I don’t know if these reasons are more than enough for you, but I believe I have here my next dividend 4 you. So, I won’t mind having Gilead share price declining to 50$ (I will double my position with my savings and I will let the management buy 10-15% more shares).

Disclosure: I am long GILD