Is This 7.4% Dividend Worth the Risk?

Looking to invest in a stock with a super-high 7.4% dividend yield with an attractive 36% payout ratio? How about a stock that meets these criteria and grew earnings by more than 27% last quarter? PDL BioPharma could be your dream stock.

On the other hand, PDL could cause you to have nightmares. Nearly all of the company's revenue comes from royalties from licensing patents that expire in December 2014. Consider this ominous statement in the company's 10-K SEC filing: "If we are unsuccessful in acquiring additional new sources of revenue sufficient to sustain our business, we will liquidate or sell our business." Ouch.

Is this seemingly great dividend stock worth the risk? Or should investors avoid PDL BioPharma like the plague?

Source: PDL BioPharma.


Wheeling and dealing
That 10-K filing hit on the key to PDL's success -- acquiring new sources of revenue. The company doesn't lack for funds to find new sources. PDL counted cash, cash equivalents, and short-term investments totaling over $258 million as of the end of last quarter.

That figure continues to be padded by nice growth from products benefiting from PDL's licensed patents. The company earns royalties from Roche's sales of Avastin, Herceptin, Xolair, Lucentis, Perjeta, and Kadcyla. Avastin sales grew 13% in the last quarter after receiving regulatory approvals in the U.S. and Europe for new indications.

Biogen Idec also pays PDL BioPharma royalties for Tysabri. Sales for the multiple sclerosis drug soared 38% year-over-year in the second quarter.

With that money disappearing not long from now, PDL has turned to other avenues. Just this week, the company announced the purchase of royalties and milestone payments for type 2 diabetes products licensed by DepoMed for $240.5 million.

This deal allows PDL to receive all royalties and milestone payments for drugs including Glumetza, Janumet, and Invokana. Janumet is the biggest blockbuster of the bunch. Merck sold more than $1.6 billion of the drug last year. Sales of Janumet-XR could top $2 billion. But the royalties that PDL will make for Janumet are only in the low single digits percentage-wise.

Depomed's license arrangement with Santarus for Glumetza could prove more lucrative for PDL, at least in the short run. Santarus will pay 32% of revenue through the end of 2014 and then 34.5% after that. Generic versions of the drug are expected to reach the market in 2016, however, which will likely cause a drop in revenue.

PDL has also made several other smaller deals over the past year, including loans and royalty agreements with small companies. Earlier this month, for instance, the company announced a $60 million credit agreement with LENSAR, which makes a laser system for cataract surgery.

Enough?
The $375 million question for PDL BioPharma will be if all of these deals will be enough to replace the Roche and Biogen revenue that will go away in the future. PDL is certainly trying. The DepoMed agreement is its biggest and boldest effort yet.

But investors could begin to worry that the level of deal-making that will be required for the company to remain a viable entity will knock that great dividend down a few notches. It's still too soon to know if PDL will be a dream or nightmare for shareholders who like that 7.4% dividend. My guess is that there could be some restless sleep in the meantime.

Dividend ideas that won't keep you up at night
Not all dividend stocks are so scary. Many are stable enough to allow you to sleep easily -- and make money in the process. Over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

The article Is This 7.4% Dividend Worth the Risk? originally appeared on Fool.com.

Fool contributor Keith Speights has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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rxluca

Your negativity is alarming.The ultimate in pessimism makes me laugh

October 22 2013 at 2:09 PM Report abuse rate up rate down Reply