Wednesday, February 2, 2011

Merck Stock Analysis

Merck (MRK) has paid dividends, as crazy as it sounds, for over 40 years.  They are in a highly competitive industry - HealthCare and more specifically - Pharmaceuticals.  The industry can be very confusing with expiring patents, regulation issues, recalls on products etc.  The pipeline for a product to come to fruition also is very long.  However, I have noticed they all enjoy paying solid dividends.  

As always, lets start with price: as of the close on February 2nd 2011 they finished at $33.82.  Their 52 week high is $39.72, with a low of $30.70.  Therefore, based on their high - they are 14.9% away from it (39.72-33.82)/39.72 is what I used.  They are 3 bucks above their low, in a way showing there is more upside than downside currently.  However, that could be my opinion, which may be different from others. 

Price to Earnings Ratio: MRK has a current 12.1 P/E ratio, below the S&P average and according to Morning star is below the 14 average for the industry it is in.  Somewhat cheaper than the industry, Morningstar can also show you more ratios that it may be better or worse than the industry.  

Dividend Yield: Merck currently has a $1.52 annual dividend.  Thus, $1.52/$33.82 = roughly 4.5% yield.  Not too shabby.  Currently yields higher than Pfizer (PFE) and Abbot Lab. (ABT), their two big competitors.  One downside that I noticed - they did not raise their dividend last year.  One positive - they didn't slice/cut their dividend during the recession.  They still do have a track record of increasing their yield, I would lookout to see what they do with their dividend this year.  Their annual growth rate in their dividend is 10.37%, again this including a 0 increase for 2010.  I'm curious to see what they do this year. 

Payout Ratio: Their dividend is $1.52 per year and their EPS (Earnings Per Share) is $2.79.  Therefore, 1.52/2.79 = 54.5%, which is in my range of the 40-60% that I like.  It's almost smack dead in the middle, displaying they give more than half of their current earnings back to their shareholders and keep 45.5% for future growth in Research and Development (a typical large expense for pharmaceutical companies).  

Conclusion: Merck is one of the big players in the pharmaceutical industry, capturing more than 60Billion in market capitalization (Shares outstanding X Share price).  With solid earnings, solid dividend growth and a very median payout ratio - they seem very attractive, with a P/E ratio lower than the industry.  However, I want to see what Merck plans on doing with their dividend this year, as I do not want to see another 0 dividend increase.  I plan on waiting to see what they do with that issue. If you are looking for a pharmaceutical company or someone in the healthcare industry - you must include Merck in your analysis/options.  

I recommend doing your own due diligence before purchasing any investment, however, and I do not make a recommendation to anyone - I simply describe how I feel about the topic at hand.  Thanks for reading!

-Lanny B.

Disclosure: I do not hold nor recommend anything. This is actual data, analysis, however I base no investor recommendation. However, I personally would add/start a position on this firm, however my direction is different from anyone else's. Thank you for your understanding.

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