The past year has been difficult for pharmaceutical giant Bristol-Myers Squibb (BMY). The stock has lost 20% of its value over the past one year.

Fortunately, the company gave investors some good news, with a strong first-quarter earnings report.

Bristol-Myers has increased its dividend each year since 2009. With two more annual increases, the company will join the list of Dividend Achievers.

The Dividend Achievers are a group of 265 stocks with 10+ years of consecutive dividend increases.

Bristol-Myers’ dividend increases have been modest—the company has raised its quarterly dividend by just one penny per share, going back to 2009.

The company has withheld raising its dividend by higher amounts, so that it could invest more aggressively in its drug pipeline.

The good news is that the investments are starting to pay off.

This article will discuss Bristol-Myers’ better-than-expected first quarter earnings report, and its growth prospects moving forward.

Quarterly Report Overview

A quick rundown of Bristol-Myers’ first-quarter results are as follows:

• Revenue: $4.93 billion, up 12%
• Earnings-per-share: $0.84, up 14%

Both figures beat analyst expectations, which called for $4.78 billion of revenue, along with adjusted earnings-per-share of $0.72.

The bottom line was particularly surprising. Analysts had expected earnings-per-share to decline from the same quarter last year.

Instead, Bristol-Myers posted a double-digit increase. As a result, it is not surprising that the stock jumped 4% after reporting earnings.

Bristol-Myers is a global company. Slightly less than half of its revenue is derived from outside the U.S.

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Source: 2016 Annual Report, page 4

In 2015 and 2016, most of Bristol-Myers’ growth came from the U.S.

For example, U.S. revenue increased 31% in 2016, to $10.72 billion. This resulted in overall company-wide revenue growth of 17% last year.

However, Bristol-Myers flipped the script in the first quarter. International markets led the way, with 18% year-over-year revenue growth. Excluding the impact of foreign currencies, international revenue rose 20% for the first quarter.

U.S. revenue growth decelerated slightly, due to intensifying competition, particularly in lung cancer. But Bristol-Myers still generated 8% domestic revenue growth.

The major drivers of Bristol-Myers’ financial performance in the first quarter, were its two flagship drugs, Opdivo and Eliquis.

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Source: Q1 Earnings Release

Last quarter, Opdivo and Eliquis revenue increased 60% and 50%, respectively.

Along with Yervoy, Sprycel, and Orencia, these five drugs fueled strong growth for Bristol-Myers in the first quarter.

Continued growth is likely moving forward, due to the company’s R&D productivity.

Growth Prospects

Bristol-Myers spends aggressively on R&D, but the spending has been well worth it.  It enjoys a highly productive R&D program.

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Source: March 2017 Cowen Presentation, page 5

Bristol-Myers has dedicated billions to research and development spending:

• 2014 R&D expense of $4.5 billion
• 2015 R&D expense of $5.9 billion
• 2016 R&D expense of $4.9 billion

This investment has really paid off: Eliquis and Opdivo grew more than 300% and 80%, respectively, in 2016.

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Source: March 2017 Cowen Presentation, page 7

Opdivo is already a nearly $4 billion drug by annual sales.

Separately, Bristol-Myers is seeing strong results outside cancer. Orencia and Sprycel both increased sales by double-digits, with $2.3 billion and $1.8 billion in sales for the year, respectively. Eliquis is even stronger—it surpassed $1 billion in revenue last quarter.

Bristol-Myers’ R&D expense increased 13% in the first quarter.

Full-year 2017 R&D spending is expected to rise in the low double-digits on a percentage basis, which should help keep the company’s growth momentum intact.

Going forward, Bristol-Myers’ key priorities are new therapies in cardiovascular, immunoscience, and fibrotic diseases.

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Source: March 2017 Cowen Presentation, page 18

Bristol-Myers has a robust pipeline. On the company’s earnings call, management said the pipeline includes “about 20 oncology assets, 20 cardiology, immuno-science and fibrosis assets, 15 compounds in pre-clinical development and nearly 80 programs in discovery”.

Thanks to its strong product portfolio, Bristol-Myers gave in a “beat-and-raise” performance.

In addition to beating analyst expectations for first-quarter revenue and earnings, the company also raised its forecast for the remainder of 2017.

For 2017, the company expects GAAP diluted earnings-per-share in a range of $2.72-$2.87, up from previous guidance of $2.47-$2.67.

At the midpoint of the updated forecast, Bristol-Myers is set to grow earnings-per-share by 5.5% in 2017.

This will be enough growth to continue investing in its pipeline, and cover its dividend.

Dividend Analysis

Bristol-Myers stock has a current dividend yield of 2.8%. The dividend is sufficiently covered by earnings.

In 2016, the company generated earnings-per-share of $2.65. Its current dividend payout is $1.56 per share.

This gives Bristol-Myers a payout ratio of 59%, based on 2016 earnings. Based on forward earnings, Bristol-Myers has a payout ratio of approximately 56%, using 2017 guidance.

A payout ratio of slightly more than half of earnings, leaves plenty of room for future dividend growth. The company understandably kept the dividend increase at another penny per quarter in 2017, since R&D expense is expected to rise considerably.

However, next year and beyond, dividend increases could accelerate.

Bristol-Myers’ dividend growth potential is strengthened by its high-quality balance sheet.

The company ended last quarter with $3.91 billion in cash on hand, along with $4.88 billion in marketable securities. It has a total of $8.79 billion in cash, equivalents, and marketable securities on its balance sheet.

It has long-term debt of $7.24 billion. The company’s cash on hand exceeds its total debt, which gives it a strong financial position.

Final Thoughts

As a pharmaceutical company, Bristol-Myers needs to invest heavily in new drug development, to keep up with the competition.

Over the past several years, the company has invested billions in R&D. This has kept a lid on its dividend growth.

But the trade-off is that Bristol-Myers is growing at a high rate. This could pave the way for higher dividend growth down the road.

Bristol-Myers has a low payout ratio, a high level of profitability, and a strong balance sheet.

These are the ingredients that should allow the company to raise its future dividend increases, possibly in the mid-single digit range.