Like many investors, I love receiving passive income from my investments. And with the financial markets still reeling from last year’s correction, there are plenty of income opportunities for investors to capitalise on. One firm in particular that’s caught my attention is Hikma Pharmaceuticals (LSE:HIK).
As yields go, it’s not got the highest, coming in at only 2.4%. And the valuation has been on a bit of a rollercoaster ride, tumbling in 2022 only to bounce back in 2023. However, amid all this chaos, I believe it to be an impressive pharmaceutical giant with lots of staying power.
Let’s take a closer look.
Hitting £100 a month
With quite a modest yield today, unlocking a £1,200 annual income stream is going to need a bit of capital. At the current share price, it translates into an investment of approximately £50,500, which is the equivalent of 2,430 shares.
Obviously, that’s not pocket change. And while it’s possible to build up to this position by drip-feeding capital over time, there are other passive income stocks around with higher yields. So, why is Hikma so interesting?
The yield today is nothing to get excited about. But that may change quite rapidly in the long run. The company is currently on its 11th consecutive year of dividend hikes, with payouts increasing by an average of 13.8% each time.
Providing this trend continues, the current yield could evolve into a far more impressive one given time. And patient investors may eventually get to reap a double-digit yield on their original cost basis from the dividends alone.
Can the dividend hikes continue?
Last year’s stock market correction didn’t help matters. But the main reason why Hikma shares tumbled into a landslide appears to be linked to its US operations. As a generics pharmaceutical company, increased competition had significantly impacted the revenue stream from one of its largest target markets.
But since then, the pricing environment has improved. Its Generics segment is back in double-digit growth territory, and its Injectables continue to deliver solid results. As such, revenue for the first six months of the year is already up by 18%.
Having said that, there are still some blemishes. International expansion into the Middle East is proving problematic due to the unstable geopolitical environment. In fact, the ongoing conflict in Sudan has forced management to cease operations, resulting in a $92m impairment charge, causing operating profits to be flat, despite sales growth.
But this is ultimately a one-time charge. And excluding this expense, underlying earnings were actually up by 35% thanks to expanding profit margins.
A quick glance at the group’s price-to-earnings ratio (P/E) of 37.5 doesn’t exactly scream a bargain. But on a forward basis, the relative valuation metric stands closer to 12.2 times. And that seems fairly undemanding in my eyes, considering the quality of the underlying business. That’s why I’m now considering adding this enterprise to my passive income portfolio.
