Better Buy: Bristol-Myers Squibb or Vanguard S&P 500 ETF?

In addition to Eli Lilly and Company (Eli Lilly(math.) andNovo NordiskOutside of a few companies like Zepbound and Wegovy, which make weight-loss drugs, investors have been wary of large pharmaceutical stocks. The high-risk nature of the pharmaceutical industry, which relies on successful new drug launches to counteract the effects of patent expirations, has made investors increasingly cautious.

This caution is evidenced by the market performance of many of the large drug company stocks, which have lagged behind the market for the past 20 years.Standard & Poor's 500Index. However, this underperformance has also created some potentially attractive investment opportunities.

Top U.S. biopharmaceutical companyBristol-Myers Squibb ( Bristol Myers Squibb )((NYSE: BMY)(BMS) is one such opportunity. Shares of BMS are currently undervalued across several valuation metrics, and the company has a strong history of innovation. In addition, it offers an attractive dividend yield of 4.97%.

But BMS's stock with the popularVanguard S&P 500 ETF (NYSEMKT: VOO)How does it compare? This exchange-traded fund (ETF) provides a cost-effective way to invest in the 500 largest U.S. companies on the market. It's also often used as a benchmark for the U.S. stock market, which has consistently performed strongly and is a core holding for many investors.

Does BMS' cheap valuation and generous dividend yield make it a better buy than the Vanguard S&P 500 ETF? Let's find out.

BMS vs Vanguard S&P 500 ETFs

BMS stock currently trades at a forward-looking price-to-earnings ratio of 6.9 times, which contrasts sharply with the average forward-looking price-to-earnings ratio of 17 times for similar stocks of large pharmaceutical companies. TakingStandard & Poor's 500 Index (S&P 500)BMS shares also seem cheap compared to the forward P/E ratio of over 20x for Dapan, represented by the company's largest shareholder, Dapan.

In addition, BMS's dividend yield of 4.97% is among the highest in the large-cap biopharmaceutical industry. This yield significantly exceeds the peer group average of 3% and the S&P 500 average of 1.35%.

Why is BMS's share price at such a steep discount to its peers in Daban and Big Pharma? Investors are deeply concerned about the ongoing changes in the company's portfolio.

BMS recently lost exclusive marketing rights to its specialty cancer drug Revlimid and plans to lose patent protection for several other drugs, including Opdivo and Eliquis, later this decade. This change in the portfolio could undermine the profitability of drug companies over the next decade.

The Vanguard S&P 500 ETF has a trailing return of about 26 times, well below the 10-year average of 33.7. Even so, the Vanguard ETF is still trading at a significant premium to the BMS stock price.

The Vanguard S&P 500 ETF offers an ultra-low 0.03% expense ratio, a sizable 1.3% yield, 13.9% average profit growth, and a high degree of diversification among U.S. Big Rock stocks.

This S&P 500 fund also offers exposure to several popular themes, including artificial intelligence, new diet drugs and cloud computing.

Conclusion

BMS is an undervalued dividend-paying stock. However, the company's stock hasn't risen to the level of a potential market battler, and BMS will have to resonate with investor sentiment toward the major drug maker and its patent cliff to outperform the S&P 500 in this decade. That's a tall order.

As a result, investors may be better off buying the Vanguard S&P 500 Index Fund than this potential bargain. The fund offers a more diversified, lower-risk investment option, despite its much higher valuation.

Should you invest $1,000 in Bristol-Myers Squibb now?

Consider this before you buy shares of Bristol-Myers Squibb:

Motley Fool Stock AdvisorThe analyst team has just selected what they think is the best name for investors to buy now.10Only ...... and Bristol-Myers Squibb is not one of them. These 10 stocks could generate huge returns in the coming years.

Stock AdvisorIt provides investors with an easy-to-understand blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. Since 2002, StockAdvisorThe service has more than doubled the return on the S&P 500 Index.

View 10 stocks only

*Stock Advisory Rates as of April 15, 2024

George Budwell has a position in the Vanguard S&P 500 ETF. the Motley Fool recommends Bristol Myers Squibb and the Vanguard S&P 500 ETF. the Motley Fool recommends Nordea. the Motley Fool has a disclosure policy. The Motley Fool has a disclosure policy.

Buy Bristol-Myers Squibb or Vanguard S&P 500 ETF This post was originally published by The Motley Fool