Recently, pharmaceutical company Merck (MRK) presented its fourth-quarter results and spoke at the SVB Leerink Global Healthcare Conference on February 17, 2022. After listening to Caroline Litchfield and Rob Davis, the CFO, and CEO of Merck, respectively, I am very confident that this company will continue to bring in more free cash flow from operations that can be used to grow the dividend yearly.
Litchfield stated that the company has four capital allocation priorities, and I feel that these are directly in line with income investors’ priorities. Merck’s internal research and development programs are the first areas of the business that will continue to get the capital allocation that it needs to continue its important mission.
This makes sense. The name of the game for Merck is to continually create, develop, and market more drugs on patent than are coming off patent and becoming available in generics and biosimilars.
The next capital allocation priority for Merck as a company is to continue to pay, and grow, the dividend in a timely fashion. This directly speaks to the company’s desire to court income investors. I think the company is stating loud and clear that it wants to be in every income investor’s portfolio by placing its capital allocation priority above all others except research and development.
The third priority for the company’s capital allocation is looking for business development opportunities, or in other words, looking for companies and technologies to buy.
Litchfield went into detail about what Merck’s management team looks for when acquiring a new company or technology. She stated that they look for scientific advances that could potentially address unmet patient needs around the world.
She also pointed to two recent acquisitions where Merck purchased the companies because of the acquired companies’ potential. Specifically, she was talking about Acceleron and Pandion. Both of these companies have pioneered scientific breakthroughs in either cell regeneration (Acceleron) or limiting immune responses in the case of autoimmune diseases (Pandion).
After the other three priorities are met, the final area that the company will then focus any unused capital on is returning capital to investors by doing share buybacks.
I think this plan and Merck’s track record make this a highly desirable dividend stock for income investors.
Recent Results and Dividend
Merck’s stock has been trading between $63.38 (the 52-week low set on September 20, 2021) and $91.40 (the 52-week high set on November 4, 2021).
MRK brought in revenues of $48.7 billion over the last twelve months and net income of $13.05 billion over the same period.
The company has reported fourth-quarter earnings of $1.80 per share, beating analyst estimates of $1.52 per share by $0.28. It has also reported $6.19 in earnings per share for 2021, beating analyst estimates of $5.92 by $0.27 during that period.
Merck currently pays a dividend of $0.69 per quarter. This is a dividend yield of 3.6%; MRK’s dividend has been slowly growing for the past 12 years. Its 10-year dividend-growth CAGR is 5.8%.
The company has a solid balance sheet. It has a current ratio of 1.3, so it has enough current assets on hand to pay its bills for over a year.
When I calculated the stock’s intrinsic value by modeling discounted cash flows, I pegged it at $127.81. I believe the company’s track record of outstanding research and development, as well as execution, will allow the company’s stock to reach its intrinsic value.
Wall Street’s Take
Turning to Wall Street, MRK stock has a Moderate Buy consensus rating based on nine Buys and five Hold ratings assigned in the past three months. At $90.38, the average Merck & Co price target implies 17.2% upside potential.
TipRanks.com shows that 92% of the 39 bloggers that have blogged about MRK in the last three months are bullish, while only 69% of bloggers have been bullish on the Healthcare sector over the last three months.
Based on the intrinsic value of this stock, the company’s ability to conduct research and development, and execute operations well, I am very bullish on this stock for income investors.
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