Biotechnology usually isn’t the first industry investors think of when it comes to dividends, but some of the more mature companies in the space do deliver payouts. Some of those names reside in the VanEck Vectors Biotech ETF (BBH).
Among biotech exchange traded funds, BBH has one of the more focused lineups, but when it comes to dividends, that works in investors’ favor because BBH’s large cap-heavy portfolio isn’t significantly diluted by smaller, non-dividend paying names.
The $431.1 million BBH, which tracks the MVIS US Listed Biotech 25 Index, sports a dividend yield of 0.28%. That’s not eye-popping, but it implies some level of safety. Speaking of payout safety, some market observers are discussing just that following the passage of the Inflation Reduction Act. That legislation paves the way for Medicare to negotiate prices on select drugs with biopharma firms.
“In aggregate, this new legislation reduced our fair values by about 2%. So, it’s not a huge impact, but it is meaningful,” notes Morningstar healthcare analyst Damien Conover. “We did reduce on average about 2%, some firms a little bit more if they have more exposure to Medicare patients and a little bit less for others. So, in aggregate, a moderate impact that we think a lot of firms will be able to navigate around. It shouldn’t be a huge falloff on value, but a modest headwind.”
BBH is home to 25 stocks with Amgen (NASDAQ: AMGN) and Gilead Sciences (NASDAQ: GILD) combining for 24% of the ETF’s portfolio. Dow component Amgen sports a new impressive track record of dividend growth and a 3.13% dividend yield. Speaking of yield, Gilead yields 4.41% — well above what investors find with most bonds.
Broadly speaking, those companies and other dividend payers in the biotech space, including BBH components, aren’t necessarily vulnerable regarding payouts when it comes to the Inflation Reduction Act and that’s a plus for investors.
“The ability of these firms to pay the dividend is very, very strong and that largely has to do with this huge portfolio of drugs. So, even though some drugs will be losing exclusivity, new drugs will be launching, and that portfolio of diversification really enables strong dividend support. So, we don’t anticipate any dividend cuts for the large biopharma industry,” added Conover.
The worst-case scenario could be slower payout growth, but biopharma firms still offer solid earnings growth, which can support increasing dividends.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
