Is Bristol Myers Squibb's High-Yielding Dividend Safe?

High-yielding dividend stocks can be great investments to hold on to in your portfolio, but only if they're safe. Betting on a high yield can be dangerous because if it ends up getting cut, you could lose all or most of the dividend income, and the stock may crash in the process as dividend investors could look elsewhere for a high payout. That's why it's always important to assess the safety of a dividend before relying on it, especially when that yield is well above average.

Healthcare giant Bristol Myers Squibb (NYSE: BMY) provides investors with a fairly high yield today -- 4.1%. By comparison, the average stock on the S&P 500 yields just 1.3%. Given the challenges ahead for Bristol Myers, with the business facing multiple patent cliffs and potentially slowing growth while also carrying significant debt on its books, this is a great example of where investors may want to take a closer look at the safety of the company's dividend before buying the stock.

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Bristol Myers posted a loss last year

A potential red flag for investors is the $8.9 billion loss the healthcare company reported in 2024. However, earnings numbers can easily be skewed by one-time charges and non-recurring numbers. In Bristol Myers' case, the company incurred $13.4 billion in acquired in-process research and development costs, which relates to its acquisition of Karuna and a collaboration with SystImmune. Without that significant expense, the company would have been in the black.

Bristol Myers' focus on acquisitions to grow its business and reduce its overall risk (it's facing patent expirations in the future for multiple drugs, including Eliquis and Opdivo) is hurting its bottom line in the short term, but it may help pay off in the long run.

This is one of the downsides of relying too heavily on just how the business has done in the past 12 months, as a loss could hurt the stock's payout ratio and make it negative, thus making the dividend look unsustainable. This is where free cash flow can be a more useful indicator of how well the business is doing.

The company's free cash flow looks solid

Free cash flow excludes non-cash items, which can make earnings numbers look a whole lot worse than they really are. And that's why for dividend investors, it can be a more useful metric to focus on. Last year, Bristol Myers' free cash totaled $13.9 billion, which was far more than the $4.9 billion it paid out in dividends.

With a good buffer above what it pays out in dividends over the course of a full year, that's a good sign that the business can weather the storm and even handle a potential slowdown in its operations and still be able to pay the dividend. The significant buffer can also allow Bristol Myers to pay down its long-term debt, which totaled $47.6 billion as of the end of last year.

Bristol Myers' dividend looks safe, and this can be a good income stock to hang on to

Investors appear hesitant to buy Bristol Myers stock because it's trading at just 9 times its estimated future earnings. There are justifiable concerns about its debt and growth prospects, but the company is investing in expanding its pipeline and that's a process that can take time. It's generating strong free cash flow, which looks strong enough to support not only the dividend but also the company's growth ambitions, while leaving room for the business to reduce its debt.

While there is undoubtedly some risk with Bristol Myers stock, it shouldn't be enough to dissuade investors from buying it. Its low valuation, high dividend, and focus on growth could make this an underrated investment to hang on to for years to come.

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bristol Myers Squibb. The Motley Fool has a disclosure policy.