Is Lilly's Dividend Safe?


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Eli Lilly (NYSE: LLY) is one of the globe's biggest drug companies. It's a major player in providing diabetes treatments and is often included in dividend investor's portfolios. Big drug companies such as Eli Lilly, Novo Nordisk (NYSE: NVO), and AstraZeneca (NYSE: AZN) offer investors predictable dividend-friendly revenue regardless of the economy's whims and whispers. But investors are correct to wonder if Lilly's dividend can be sustained in light of billions in at-risk revenue tied to patent expiration on two of the company's top selling drugs. In the following slideshow you'll see whether I think Lilly's dividend is safe and gain insight into how Lilly's dividend payout matches up with industry peers Novo Nordisk and AstraZeneca.

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Is Lilly's Dividend Safe?

  1. 1. Is Lilly’s Dividend Safe?
  2. 2. Is Lilly’s dividend safe? 1. Patent expiration – Cymbalta lost patent protection in December. • Cymbalta sales totaled $5 billion in 2013. – Evista lost patent protection in March. • Evista generated $1 billion in sales during 2013. 2. Shrinking margin – Operating margin has slumped nearly 4% since 2011. 2 big and important question marks hang over Lilly’s dividend:
  3. 3. Patent expiration • Once branded drugs lose patent protection, brand sales typically fall by between 80% and 90% over time. Cymbalta and Evista’s sales are likely to continue lower throughout this year. •Cymbalta sales fell 64% a year ago to $478 million in Q1. •Evista sales fell 38% from last year to $150 million in Q1. •2014 EPS guidance exiting 2013 was for $2.77 to $2.85; down from $4.15 in 2013. – EPS Guidance was reduced to $2.72- $2.78 exiting Q1 •2014 revenue guidance exiting 2013 was for $19.2 billion to $19.8 billion, down from $23.1 billion in 2013. – Revenue guidance was adjusted to $19.4 billion to $20 billion exiting Q1. First, let’s consider Lilly’s patent calendar.
  4. 4. Shrinking margin Lilly’s operating margin has fallen from 25% to 21% since 2011 and the loss of patent protection on Cymbalta and Evista forced the company’s gross margin down 5.4% year- over-year in the first quarter. The company expects full year gross margin of 73%, down from 74% estimates exiting 2013. Lilly is restructuring to offset margin erosion with hopes of realizing $1 billion in annual savings. If so, a leaner company could help re-ignite profit once top line growth returns.
  5. 5. Reasons for dividend optimism – The company currently doesn’t boast any fast-growing new compounds. • Forteo posted the best year-over-year growth in Q1, rising 7% to $300 million. – Lilly needs a blockbuster win from its R&D pipeline. • Dulaglutide is a GLP-1 diabetes therapy under FDA review for approval. – In trials once-weekly dulaglutide was as effective as Novo’s once-daily blockbuster drug Victoza. – If approved dulaglutide will also compete against AstraZeneca’s Bydureon and Byetta. • Empagliflozin is a SGLT-2 diabetes therapy recently denied by the FDA for approval. – The denial was based on manufacturing concerns at partner Boehringer’s European plant, not empagliflozin’s efficacy or safety. – Concerns have since been resolved, allowing for a resubmission for approval. If approved, it will compete against Johnson’s Invokana and Astra’s Farxiga. • Cyramza won FDA approval in post-chemotherapy gastric cancer in April. – 1 million new cases diagnosed annually; 3rd leading cause of cancer death. – Potential as a lung cancer treatment. Lilly is developing new products that could offset patent risk.
  6. 6. Cash dividend payout Lilly’s cash dividend payout ratio, which measures how much of a company’s operating cash minus capital expenses and preferred dividends is being spent to pay common dividends, is 47%. That’s lower than Novo-Nordisk, which competes against Lilly with products including the insulin Novolog, and AstraZeneca, which markets various diabetes drugs including the DPP-4 drug Onglyza. Theoretically, Lilly’s lower ratio puts it in a better position to eventually boost its dividends, but only once sales stabilize.
  7. 7. Current yield Lilly’s dividend yield is 3.3%, which trails AstraZeneca’s 3.79% rate, but is higher than Novo’s 1.33% yield. While that yield is intriguing, patent risks and pipeline uncertainty suggest dividend investors approach Lilly cautiously.
  8. 8. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.