Gurufocus.com ran an article April 3rd, 2012 on “High-Dividend Yielders for 2012”. Merck (MRK) was one the five stocks recommended in the article. Apparently the author of the article thinks that a 3% dividend yield is a high dividend. I think that a stock needs to yield at least 6% to be considered a high dividend stock. Merck has some volatility in it’s earnings and it is approaching speculative pricing territory. Read on to see when Merck was a value stock worth buying.
http://www.gurufocus.com/news/170209/5-highdividend-yielders-for-2012
Merck (MRK)
Price: $38.58
Shares: 3.04 billion
Market capitalization: $117.47 billion
What the company does – Merck & Co., Inc. (Merck) is a global health care company. Merck delivers health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. It operates in four segments: Pharmaceutical, Animal Health, Consumer Care and Alliances. Pharmaceutical segment includes human health pharmaceutical and vaccine products marketed either directly by Merck or through joint ventures. Human health pharmaceutical products consist of therapeutic and preventive agents, sold by prescription, for the treatment of human disorders. It sells these human health pharmaceutical products to drug wholesalers and retailers, hospitals, government agencies and managed health care providers. In September 2011, it sold its 50% interest in the Johnson & Johnson-Merck Consumer Pharmaceuticals Co. joint venture. In December 2011, it announced establishment of an Asia Research & Development headquarters for drug discovery and development located in Beijing, China.
Morningstar’s take - Facing increased competition, patent losses, and a pipeline of late-stage drugs with poor chances of approval, Merck greatly improved its long-term outlook by acquiring Schering-Plough. Without Schering, Merck's prospects were muddled, despite its recent success launching several new blockbusters. Now, with the addition of Schering, we believe Merck is favorably positioned for long-term growth.
Preferred stock: none that I’m aware of.
Bonds: $8.9 billion outstanding. Some big bonds are coming due in 2015, but they aren’t threatening this year’s dividend.
DIVIDEND RECORD: Merck paid a $0.03 quarterly dividend in 1987. The quarterly dividend has grown to $0.42 per share in 2012. It has increased its dividend 1,300% over 25 years. Merck is a dedicated dividend grower.
Dividend: $0.42 quarterly
Dividend yield: 4.35% (Merck becomes a 6% high dividend stock at a price of $28.00 per share)
Dividend payout: 82.8% using recent EPS of $2.03 –OR- 82.3% using average adjusted earning power of $2.04
EARNING POWER: $2.04 @ 3.04 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2007 | ($1.04) | $3,275 M | 2,193 M | $1.08 |
2008 | $3.63 | $7,808 M | 2,145 M | $2.57 |
2009 | $5.65 | $12,853 M | 2,273 M | $4.23 |
2010 | $0.28 | $859 M | 3,120 M | $0.28 |
2011 | $2.02 | $6,257 M | 3,040 M | $2.06 |
Merck’s five year average adjusted earnings per share is $2.04
Consider contrarian buying below $16.32 (8 times average adjusted EPS)
Consider value buying below $24.48 (12 times average adjusted EPS) Merck’s stock price bottomed at $23.45 in April 2009.
Merck (MRK) is currently trading at 18.9 times average adjusted EPS. This is stock is priced for investment, but is nearing speculative pricing.
Consider speculative selling above $40.80 (20 times average adjusted EPS)
BALANCE SHEET – 44% of Merck’s assets are comprised of goodwill and intangibles ($46.457 billion of $105.128 billion). From 2003 through 2007 intangible assets only comprised about 4% of Merck’s total assets. I don’t like so much subjectivity determining asset values. The price to book value is too high. The price to tangible book value is astronomical.
Book value per share: $17.93
Tangible book value per share: $2.65 TBV is found by subtracting goodwill ($12.155 B) and intangibles ($34.302 B) from shareholder equity ($54.517 B) and then dividing by the number of shares (3.04 B)
Price to book value ratio: 2.15 (under 1.0 is good)
Price to tangible book value radio: 14.6
Current ratio: 2.04 latest quarter (over 2.0 is good)
Quick ratio: 0.92 latest quarter (over 1.0 is good)
Debt to equity ratio: 0.28 (lower is better)
Percentage of total assets in plant, property, and equipment: 15.5% (the higher the better) Current assets account for 31.6%, long term assets 5.46%, and other equity/investments 3.29%.
Working capital trend is way up. Working capital equals current assets less current liabilities. Financially strong companies have a positive upward trend.
CONCLUSION – As usual, the best time to buy MRK in recent years was in April 2009. It was a value investment back then. Merck is a steady dividend payer and grower. The dividend yield is nothing special until the stock takes a beating. The company is still priced for investment at this time, but it’s getting dangerously close to 20 times average adjusted earnings. I think it is time to get out of Merck. Scale out of it above $40.80. The balance sheet is weak when you look at the price to book value ratio and the tangible book value ratio. Much of its assets are intangibles. That in never a good sign. Pharmaceutical companies are always a the mercy of FDA bureaucrats and their clinical trial approvals. I don’t like the Sword of Damocles hanging over my investments. I wouldn’t buy Merck until it is back below $24.48, if at all.
DISCLOSURE – I don’t own Merck (MRK).
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