This dividend stock offers an attractive dividend and the potential for tens of percent growth
Dividend companies are undoubtedly an extremely interesting topic for many investors. However, a large number of them may be put off by the limited growth potential. But that might not be the case with this healthcare giant.
Merck $MRKis-0.2%an American pharmaceutical and chemical company founded in 1891. Its business activities include the manufacture and sale of pharmaceuticals, vaccines and medical devices; the provision of laboratory services for diagnostics, clinical research and bioresearch; and the manufacture and sale of biotechnology products, drug substances and materials for the research and development of new drugs and vaccines in areas such as cardiovascular disease, oncology and infectious diseases.
Major divisions include Pharmaceutical, Animal Health, Healthcare Services and Life Science.
Major products include the cervical cancer vaccine Gardasil , the flu vaccine Fluzone, the cancer immunotherapy Keytruda, the antidepressant Januvia for the treatment of type 2 diabetes, and a range of animal health products.
The company operates globally in more than 140 countries. The company is headquartered in Kenilworth, New Jersey, USA.
Sector specifics
The pharmaceutical and biotechnology sector has several specific features that distinguish it from other sectors. High costs are associated with the development of new drugs, which takes years and costs billions of dollars. Many clinical trials and studies are conducted.
Patents on new drugs are usually only valid for 10-15 years, which guarantees companies a limited monopoly. Then cheaper generics can enter the market. The sector is strictly regulated by authorities such as the FDA and EMA. Companies must meet high standards of safety, quality and efficacy of their medicines.
The pharmaceutical sector is strictly regulated by the authorities mainly to protect public health and consumer confidence in medicines. The authorities require extensive clinical trials and testing to ensure the safety and efficacy of medicines. They also set standards and procedures for the manufacture, storage and distribution of medicines to ensure their consistent quality. They also oversee compliance with rules on the marketing of medicines to protect consumers from fraudulent claims.
Major regulatory authorities such as the FDA, EMA and WHO approve the marketing of new medicines and oversee their safety, efficacy and compliance. Their regulation aims to ensure the safety and efficacy of medicines for patients and public confidence in medical products.
With limited competition due to patents, pharmaceutical companies can achieve high margins, probably the highest of any sector.
Competition
Merck has a number of global competitors in the pharmaceutical and biotechnology industries. These include pharmaceutical giants.
Pfizer $PFE+3.2% - the largest pharmaceutical company that produces a range of drugs for a number of diseases, including vaccines. Its revenues are larger than those of Merck.
Johnson & Johnson $JNJ+0.1% - a giant involved in pharmaceuticals, medical devices and personal care. It is also larger than Merck.
Novartis $NVS+0.1% - Swiss company that produces generic drugs, specialty drugs and vaccines.
Other major competitors include Roche, GlaxoSmithKline,AstraZeneca and Eli Lilly $LLY+1.9%
These companies are Merck's main competitors in the development of new drugs and vaccines, in the regulatory approval phase, and in gaining market share. Merck must therefore continually innovate and develop more reliable and effective drugs to compete.
Current situation
Although the quarterly results were good and the operational outlook for the near future is enticing, Merck is not necessarily a great buy. Valuation must also be considered, and since Merck's stock has risen quite significantly over the past year.
The valuation is about 17 x forward net income. That's not a very high valuation, but it's also not particularly low for a pharmaceutical company. The competition is cheaper. The higher price also makes a dent in the dividend, which I'll mention later. In fact, looking at Merck's dividend, the yield has fallen to 2.5% - not bad at all, but less attractive than the dividend yield of well over 3% that Merck offered last fall.
Dividend
Dividends on healthcare stocks average 1.7%, which is lower than other sectors. However, some big pharma stocks yield 2% to 4% and can be a good defensive bet in a slowing economy.
Merck & Co.
MRKCapital Structure
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Even when their product does well, there is always the threat of patent expiration, making it difficult to predict sales more than a few years ahead. The future value lies in the development of drugs at various stages of development. And companies tend to make large-scale acquisitions to restore sales, sometimes buying the rights to drugs that have not yet proven to be winners. So the future of the dividend is not always entirely certain.
But Merck could be an exception. Sales of its hit cancer drug, Keytruda, rose 22% last year to nearly $21 billion. Consensus estimates call for its sales to climb to $24 billion this year , or 41% of Merck's $58.7 billion total. Its U.S. patent expires in 2028, a long way off.
Merck will have to restore sales when Keytruda is off patent. Which remains a question. The company recently announced a $10.8 billion deal for Prometheus Biosciences. That should help.
Acquisition
I've mentioned the acquisition before. The transaction with Prometheus Biosciences, Inc. will increase Merck's net debt by quite a bit, to about $29 billion.
The overall impact on Merck is that net debt will increase a bit, while still being very manageable for Merck.Still, this makes one wary of Merck.
The deal is aimed at increasing the company's exposure to immunology. Promotheus is a clinical-stage biotech company.
This includes its lead product PRA023, a humanized monoclonal antibody for tumor-associated intestinal inflammation and fibrosis. This candidate has shown promising results and strong efficacy in both primary and secondary target parameters in Phase 2 studies. If all goes well, the transaction is expected to close in the third quarter. Given the nature of the transaction, adjusted earnings dilution of a quarter of a dollar per share is expected, which in dollar terms is just over $600 million. This is comprised of operating losses of the acquired business and additional interest expense.
If it works out, however, the company is well positioned for the future and Merck will have secured the favor of investors.
What about you? Are you investing in Merck? Or in a competitor?
Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.
Definitely $CVS+0.7% for me. But otherwise thanks for the new information and for the tip.
For me, $CVS+0.7% and $JNJ+0.1% are the bigger certainties... :)
The only downside is that I'm not interested in this sector at all... 😏
Dividend is not as interesting to me as a sector, though, as one that I think has a future 😊.