This $44 Billion High-Yield Stock Could Be In Trouble

It’s one of the largest pharmaceutical companies in the world.

I added the shares to my High-Yield Investing portfolio in January 2009. Over the following two years, I received $2.54 a share in dividends thanks to a 5% yield. Meanwhile, the price rose steadily for a gain of more than 40%.

Dividends of $1.28 per share in 2010 were paid out of earnings of $1.79 per share, for a comfortable 72% payout ratio. The current dividend rate of $1.32 per share is amply covered by management’s projected earnings of $2.00-$2.10 a share this year.

So why on Earth did I sell this seemingly rock-solid dividend payer from my portfolio earlier this month? I’ll tell you…

The market’s recent pullback has been a long time coming. If it weren’t for the tragedy in Japan or riots in Libya, then higher interest rates, or weaker-than-expected economic growth, or the end of the Federal Reserve’s monetary stimulus would have served as a catalyst for a correction.

The run-up was fast and furious. The U.S. benchmark S&P 500 topped 1,300 for the first time in two and a half years, more than doubling off its March 2009 low of 666.79.

The questions now are how long will this correction last, how deep will it go, and will the market resume its upward course? Investors are jittery.

Given the uncertainty, I’ve been scrutinizing my High-Yield Investing portfolios with an eye toward taking profits on some of my “weak sisters.”

And despite a seemingly solid dividend, Bristol-Myers Squibb (NYSE: BMY) is one holding I’ve sold.

Part of the reason? A dramatic underperformance against the broader market.

In 2009, Bristol-Myers delivered total returns, including dividends, of 14% versus 27% for the S&P 500; in 2010, returns were 9% versus 15% for the benchmark index; and year-to-date, negative 2% returns compare with positive 2% returns for the S&P 500.

Meanwhile, like most large pharmaceutical companies, many of Bristol’s major drugs will face patent expirations and be replaced by cheaper generic versions.

Blood thinner Plavix, the company’s best-selling drug, and heart drug Avapro will lose their patent protection next year. Together, they accounted for 40% of sales in 2010. During the next four years, patents will also expire on top selling products such as Sustiva and anti-psychotic drug Abilify, the company’s second-largest selling drug.

Action to Take –> So while the shares offer a solid 5% yield and are attractively priced at 15 times trailing 12-month earnings, the underperformance and future questions about its drug lineup are worrisome. Given the uncertainties that lie ahead, it’s one yield I’m passing on.

P.S. — What am I buying instead of BMY? My portfolio contains some unique income securities… preferred shares paying 9.0%, master limited partnerships paying 6.1%, and exchange-traded notes paying 7.7%. But the rarest have to be perpetual cash machines. I’ve found a few of these weird securities paying above 10%. Read this memo to learn more about them.