The Dow Jones Industrial Average is an index of 30 of the largest companies in the U.S. and it serves as a popular (if somewhat flawed) indicator of how the broader stock market is doing, and it has averaged an annual return of 8% since the 1980s. But what would it take to beat the index?
Pharmaceutical company Gilead Sciences (GILD 0.32%) is one possible answer. The stock's been unstoppable, up 21% since January despite the market's decline. The company pays a solid dividend and could have the growth prospects to deliver market-beating returns over the next several years. Here is what you need to know about this unstoppable dividend stock.
A shining star in this gloomy market
Look no further than the below chart for proof -- Gilead's stock has nearly quadrupled the performance of the Dow Jones Industrial Average in 2022. You can see that the stock created distance in recent months, and strong third-quarter earnings were the catalyst. Gilead's Q3 earnings included revenue and earnings per share (EPS) that came in higher than analyst expectations, plus the company raised its full-2022 revenue guidance by roughly $1 billion.
Gilead's products for treating HIV are its primary business. Category sales were $12.4 billion (63% of total revenue) through nine months of 2022, a 5% year-over-year increase. Gilead's oncology products are a much smaller part of the company but grew 79% year over year in Q3. Analysts are optimistic about Gilead's growth prospects, estimating EPS growth averaging 15% annually over the next three to five years. Potential growth catalysts include a label expansion for an oncology drug and a new HIV treatment pill that requires just two doses annually.
Wait, there's more
Growing at 15% is nearly double the average historical rate of the Dow Jones Industrial Average, but Gilead is also a strong dividend stock. The company has paid and raised its dividend for seven years. That might not sound very impressive, but the dividend payout ratio is just 41% of cash flow, so there's room for future increases. The 3.2% dividend yield is an excellent starting point for income-focused investors.
GILD Cash Dividend Payout Ratio data by YCharts
Gilead does have $25 billion in long-term debt, so investors should monitor this. Investors might hope for Gilead to raise the dividend conservatively until it pays down a chunk of its obligations. There is also $5.6 billion in cash on the balance sheet, so Gilead does have some financial flexibility.
Should investors worry about valuation?
As you might imagine, Gilead's 21% move in just a year has also impacted the valuation. You can see below that the stock's surge has moved the forward price-to-earnings (P/E) ratio to more than 12. It would have been great to buy the stock earlier when the valuation was lower, but that doesn't mean that Gilead is expensive today.
GILD PE Ratio (Forward) data by YCharts
The stock's median P/E ratio over the past decade is just under 17, so historically, Gilead is still attractively valued compared to where it's been in the past. Additionally, the Dow Jones Industrial Average trades at a forward P/E of nearly 19, a hefty premium to Gilead. This seems hard to justify, considering Gilead's strong earnings outlook is beyond the rate at which the Dow Jones has historically grown.
Stocks with positive returns have been rare in 2022, but Gilead's more than held its own against the broader market. However, the good times don't appear to be over yet. Solid fundamentals and an attractive valuation could lead to similar success next year.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Gilead Sciences. The Motley Fool has a disclosure policy.
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