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Merck Stock: Attractive Dividend Play at Current Levels

Merck (MRK) is one of the largest international healthcare companies, focusing on delivering innovative health solutions through its prescription medicines, vaccines, biologic therapies, animal health products, and other related pharmaceuticals.

Since completing its spinoff with women’s health company Organon in June, the company’s operations are mainly split into two segments, which are the Pharmaceutical and Animal Health segments, both of which are reportable. (See Insiders’ Hot Stocks on TipRanks)

Merck’s diversified portfolio of pharmaceuticals and animal health medicines comprises a great stream of cash flows for the company. Merck is highly profitable, offering a strong dividend, while the stock is trading at an attractive valuation multiple. For this reason, I am bullish on the stock.

Results Remain Strong

Merck’s portfolio of pharmaceutical brands provides the company some of the most stable and reliable cash flows in the industry.

Merck’s latest quarterly results once again reflected its portfolio’s strength. In Q2, revenues grew 22% to $11.4 billion, beating analysts’ estimates by $200 million. Adjusted net income came in at $3.3 billion, or $1.31 per share, versus $2.5 billion, or $1.02 per share, in the prior-year period.

While COVID-19 adversely affected the company last year, the pandemic appears to have had positive impacts on Merck’s recent results. The company estimates that the net favorable benefit of the pandemic’s recovery to year-over-year sales growth was approximately $900 million in Q2.

Specifically, pharmaceutical revenues expanded 18% to $10 billion, and note that this is with a 4% currency exchange drag on results. Notable advances include Keytruda (treats cancers such as melanoma and non-small cell lung cancer), which reported sales growth of 20% to $4.1 billion.

Due to Keytruda continuing to see more eminent uptick rates across a number of indications, it is likely that its sales are to keep growing at a strong pace moving forward.

Further, Merck’s HPV vaccine Gardasil‘s revenues surged 78% to $1.2 billion, powered by the ongoing recovery in the U.S. and China.

Reasonably Priced

Following Q2’s strong results, Merck provided updated guidance for the full year. Subsequent to the Organon spinoff, Merck estimates revenues of $46.4 billion to $47.4 billion for the year (previously $45.8 billion to $47.8 billion), which indicates a 12% to 14% growth year-over-year. Furthermore, adjusted EPS is forecasted to be in a range of $5.47 to $5.57.

At the midpoint of this EPS estimate ($5.52), the stock is currently trading with a (sort of forward) P/E of 14.4 attached, which is a rather inexpensive multiple in the current environment.

Further, the stock offers a yield of around 3.2%, which is one of the highest in big pharma, and a great yield in the market generally these days.

Merck’s latest DPS hike was by a solid 6.6%, and it’s quite likely that future hikes (with the next one likely scheduled this November) are to come.

Wall Street’s Take

Turning to Wall Street, Merck has a Moderate Buy consensus rating, based on six Buys, four Holds, and zero Sells assigned in the past three months. At $93.30, the average Merck price target implies 17.2% upside potential.

Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.

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