Bristol-Myers Squibb: Steady prescription

While they don�t always deliver eye-popping growth, stocks that offer a steady stream of growing income are must-haves for the conservative investor.

With that in mind, we recommend Bristol-Myers Squibb (BMY) as a dependable income play that warrants a place in our income model portfolio.

Because patent protection lasts 20 years from the date of application, pharmaceutical companies able to successfully develop and market major drugs enjoy lucrative and unchallenged sales for a number of years.

But new products must continually be developed to offset the sales declines that accompany patent loss. They are key to keeping a company�s cash-generating engines churning relatively uninterrupted. Bristol-Myers Squibb (BMY), the $48 billion giant, fits this bill nicely.

We sold Bristol-Myers in early 2010 due to uncertainty over whether the company could compensate for the May 2012 expiration of its U.S. patent on the hugely successful Plavix (the #2 selling drug in the country).

The stroke and heart attack prevention drug, jointly marketed with Sanofi-Aventis, is both the top seller and current growth driver for the company, with $6.7 billion in 2010 net sales.
In addition, its fifth-best selling drug Avapro/Avalide, with $1.2 billion in 2010 net sales will similarly lose U.S. patent protection in March 2012.

However, in recent months, Bristol-Myers has shown amazing progress in re-energizing its pipeline.

One of its most promising new products is Yervoy, a treatment for late stage melanoma that has exhibited very good efficacy during trials.

Yervoy stimulates the immune system to recognize and attack cancer cells, and is being further tested for use against other cancers such as lung and prostate cancer.

If the drug�s use can be expanded to treat more common cancers, Yervoy has the potential to be a multi-billion product in the league of Plavix.

The drug was launched in the U.S. in April, and is delivering on its promise; second-quarter sales were $95 million, fantastic for a newly-launched drug. Approval to market in the E.U. was granted in July.

During the second quarter, Bristol-Myers booked a 14% year-on-year improvement in net sales, grew EPS by 4% and revised its 2011 earnings guidance upwards to $2.20-$2.30 per share despite headwinds from U.S. health care reform and E.U. austerity measures.

Sales for new products were strong across the board and the company received a string of new approvals.

Plus, encouraging results from a number of late-stage clinical studies make the company�s pipeline arguably one of the best in the industry.

Reflecting the loss of Plavix exclusivity, the company expects 2013 adjusted EPS to be around $1.95, after which new products are expected to restart earnings growth.

The company generates more than $1 billion in free cash flow annually and had $5 billion in cash at the end of June.

The stock is trading at just 13 times projected 2013 EPS, a reasonable valuation given BMY�s consistent track record, strong pipeline and generous 4.7 percent yield.

With a dividend payout ratio of just 63%, the dividend is safe. Bristol-Myers joins the Income Portfolio this month.