Is Merck's dividend safe?


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Merck is one of the world’s biggest drugmakers and is a staple in dividend investors’ portfolios. That’s because drugmakers like Merck offer investors a steady (and predictable) stream of dividend boosting revenue. But investors are right to wonder if Merck’s dividend is on solid footing given the patent cliff has taken a toll on its sales.

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Is Merck's dividend safe?

  1. 1. Is Merck’s Dividend Safe?
  2. 2. Is Merck’s Dividend Safe? 1. Patent expiration – Merck lost exclusivity for its $5 billion-a-year Singulair in 2012. Sales of Singulair toppled nearly 70% to $1.2 billion in 2013, forcing Merck's full year sales down 7% to $44 billion. – Merck also lost protection on its $900 million-a-year brain-cancer drug Temodar, and its $600 million-a-year drug Maxalt last year. 2. Shrinking margin – Big drug launches last decade pushed R&D and administrative spending to new highs, forcing operating margin to tumble over the past decade. 2 big and important question marks hang over Merck’s dividend.
  3. 3. Patent Expiration 1. While Merck has seen some high profile drugs lose patent protection, sending sales stumbling, the worst may soon be behind it, particularly once its billion dollar allergy drug Nasonex loses protection this year. The majority of its expiring patents are spread out across the rest of this decade and pale in comparison to Singulair. The biggest loss will be for the $2.7 billion per year, cholesterol fighter Zetia, which loses protection in 2017. First, let’s consider Merck’s patent calendar.
  4. 4. Shrinking margin Now, let’s take up the issue of falling margin. There’s no question that Merck’s swelling waistline made it too heavy to maintain its mid 2000’s profitability. But the company is cutting 20% of its workers to shave $2.5 billion in expenses, roughly $1 billion of which will show up in 2014. That may suggest a leaner, healthier and more profitable Merck in the future.
  5. 5. Reasons for dividend optimism 1. A maturing pipeline of new products • Merck’s highly anticipated cancer drug MK-3475 may have blockbuster potential if its ever approved. The drug is being studied across 13 trials for 30 types of cancer, and Merck has filed a rolling submission for the drug as a treatment for advanced melanoma – a decision for which is expected from the FDA in October. • Merck recently won approval for two new oral allergy medications: Grastek and Ragwitek for two of the most common seasonal allergies. 2. Flush with newfound cash  Merck just announced the sale of its consumer care business to Bayer for $14 billion. Add that to the $20 billion in cash and equivalents and $11 billion in long term investments* on Merck’s balance sheet and you have plenty of growth and dividend boosting fire-power. *Source: Merck’s Q1 10-Q Merck has operational challenges, but good news could kick-start results.
  6. 6. Cash dividend payout Merck’s cash dividend payout ratio, a measure of how much of its operating cash after paying for capital expenses and preferred dividends, doesn’t appear too worrisome given that at 51% its not much higher than Johnson & Johnson’s and its lower than Bristol-Myers.
  7. 7. Current Yield Merck’s current dividend yield is slightly above 3%, which gives it a higher yield than competitors Johnson & Johnson and Bristol-Myers. Given Merck could see upside from new products, a less troublesome patent calendar, cost-cutting, and has billions on the balance sheet, Merck’s dividend picture doesn’t appear too worrisome.
  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.