Surprise! Gilead Sciences Inc. to Pay a Dividend

Gilead Sciencesreported a better than expected fourth-quarter earnings report yesterday. But the real surprise was the company's decision to starting paying a dividend starting in the second quarter of 2015.

According to CFO Robin Washington's comments on the conference call, Gilead will pay an annual dividend of $1.72 per share ($0.43 on a quarterly basis), which translates into roughly $2.6 billion in yearly payouts, based on the biotech's current share count.

Source: Gilead Sciences

Gilead's decision to pay a dividend apparently stems from its stunning 122% increase in total revenues, year over year, to a whopping $25 billion, and management's confidence that the ongoing pricing war withAbbVieover its rival hep C drug, Viekira Pak, won't result in a major drop-off in revenues going forward. As a sweetener, management also announced a new $15 billion share buyback program that will be executed over the next five years.

Despite the huge size of these shareholder rewards, Robin noted on the call that Gilead's strong cash flows should not only support these programs, but also allow the company to continue exploring M&A opportunities as well.

Given that this is the first time in the biotech's operating history that it will offer a dividend, let's consider if this is indeed the best use of the company's growing cash flows.

Why now is the time to roll out a dividendBased on its rapidly growing revenue stream, Gilead's shares have long looked grossly undervalued in relation to its peers. Specifically, the stock is presently trading at a forward price-to-earnings ratio of about 10, making it one of the cheapest companies in healthcare on a forward-looking basis.

Despite repeatedly reporting blow-out quarterly results, Gilead's shares have stagnated around the $100 a share mark since last September:

In a nutshell, the market has failed to buy into Gilead's growth story, presumably over fears stemming from Viekira Pak's launch and the pushback from payers over the cost of Gilead's hep C drugs Sovaldi and Harvoni.

Now that these headwinds appear to be resolved for the most part, I think management is attempting to unlock the company's latent value by growing its shareholder base. A dividend should broaden the shareholder community by intriguing income-oriented investors.

Perhaps most importantly, these types of investors tend to take a longer term view of the markets, which could help to dampen down the biotech's recent volatility in share price. As the chart below illustrates, Gilead's shares have been on an absolute roller coaster ride compared to the broader biotech industry:

A dividend should thus be a good thing for Gilead moving forward -- a savvy decision on management's part and a good use of the company's rising free cash flows.

A dividend may mark the end of an era for GileadGilead's monstrous growth under CEO John Martin has been driven primarily by a suite of acquisitions that have helped to greatly diversify the company's drug portfolio. Indeed, it was the $11.2 billion buyout of Pharmasset in 2011 that gave rise to Gilead's hep C franchise in the first place.

Simply put, John has frequently used the company's free cash to pursue the acquisition of potentially game-changing new drugs, with some of the most important deals soaring into the multi-billion dollar range.

Gilead might not be so keen to engage in high dollar acquisitions moving forward, and instead, may focus on smaller deals like its recent buyout of Phenex Pharmaceuticals for a reported $470 million. The problem is that management is essentially earmarking about 20% of revenues for shareholder rewards over the next five years (dividends and buybacks).

So unless management wants to dip into its $11.7 billion in cash and cash equivalents, we probably won't see this top biotech make a huge splash on the M&A scene soon. Then again, biotech valuations are presently at such inflated levels that this may not be a bad thing.

Is Gilead a buy on the back of this surprising news?I've thought that Gilead has been a great pickup for several quarters now, as it appears set to continue its evolution into one of the biggest drugmakers in the world. So this dividend news only peaks my interest all that much more.

Given Gilead's rock-solid cash flows, a bevy of significant shareholder rewards now in place, and the best hep C franchise in the game, investors may want to take a good long look at this premium name in the healthcare sector.

The article Surprise! Gilead Sciences Inc. to Pay a Dividend originally appeared on Fool.com.

George Budwell owns shares of AbbVie and Gilead Sciences. The Motley Fool recommends Gilead Sciences. The Motley Fool owns shares of Gilead Sciences. 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.