Merck & Co. (NYSE: MRK) might be best known for its drugs like Keytruda and Gardasil, but those blockbusters haven’t been enough to get shareholders excited as the share price has fallen under water this year, down 6%.
It may well be a pharmaceutical powerhouse but recent price weakness suggests that Merck may be flying under the radar for investors, particularly those with any eye on value.
While casual observers focus on the headline success of its oncology and vaccine programs, few pay as close attention to Merck’s financial health and extensive pipeline that makes it very interesting as both a dividend play and a value opportunity.
Key Points
- Merck’s 2.9% yield is well-supported by a low payout ratio, consistent dividend increases, and strong cash flow, ensuring a reliable and growing income stream.
- Merck’s pipeline, including mRNA cancer vaccines and cardiovascular treatments, offers significant growth potential, positioning the stock for future upside.
Dividend Stability Ensures A Secure Income Stream
For income-oriented investors, Merck’s dividend is starting to look very appetizing.
Currently yielding 2.90%, this income stream is well above the sector average, making it one of the more attractive options in the healthcare space for those on the hunt for a generous quarterly payout.
The reliability of this payout is what sets Merck apart from peers and that’s in large part due to the manageable payout ratio of 55.6%. Translating that simply, in spite of paying generous dividends, Merck retains more than enough cash to reinvest in growth opportunities or weather market downturns.
Management’s commitment to returning value to shareholders is clear when looking in the rearview mirror at its dividend history. The Board of Directors has consistently raised its dividend over the years, including a recent 6% increase that suggests those in the know are confident in the company’s long-term growth prospects.
For investors concerned about dividend safety, Merck’s payout is well-covered by both earnings and free cash flow so there is lots of assurance that its yield will remain secure.
Merck Balance Sheet Is A Fortress of Stability
Merck’s financial health is another thing of beauty that income-oriented investors will appreciate.
The company’s balance sheet is exceptionally strong and features approximately $11.3 billion in cash and cash equivalents. That’s more than enough firepower to pursue acquisitions, invest further in R&D, or continue rewarding shareholders with dividend hikes, or even repurchases.
The liquidity is one side of the coin and debt obligations are the other. Total debt of $34.7 billion isn’t stellar but the debt-to-equity ratio of around 0.7x suggests it’s sustainable.
Add to this the strong cash flow generation of over $4.8 billion last quarter and Merck’s dividend appears not only to be stable but also has room to grow.
Furthermore, the interest coverage ratio is comfortably high and so it can easily meet its interest obligations even if economic headwinds are encountered.
Add to that the future outlook, which is starting to look really good and investors might really be overlooking this pharma giant.
Merck’s Pipeline Is Filled with Hidden Growth Catalysts
Beyond its stable income appeal, Merck’s pipeline has the potential to spark significant upside.
While casual observers are focused on the revenue-driving potential of Keytruda, Merck is quietly building a portfolio of innovative treatments in oncology, cardiovascular health, and vaccines.
Take for instance its collaboration with Moderna on mRNA cancer vaccines that is breaking new ground according to early trial data that shows promise in reducing melanoma recurrence rates. If this vaccine wins FDA approval, it has the potential produce billions in future revenues, and further support the already generous dividend.
And then there’s the recent $10.8 billion acquisition of Prometheus Biosciences to support its immunology portfolio, and specifically targeting chronic autoimmune conditions like Crohn’s disease and ulcerative colitis. These conditions require long-term treatment, create recurring revenue streams and can fund future dividend increases.
Cardiovascular Is An Overlooked Growth Opportunity
Where opportunity lies but is not widely recognized now is Merck’s expansion into the cardiovascular market. The company’s high-profile oncology division usually takes the headlines but cardiovascular deserves more attention on it.
Merck’s sotatercept, which targets pulmonary arterial hypertension (PAH), has the potential to be a game-changer given that recent clinical trials have shown sotatercept’s ability to significantly improve patient outcomes and allows Merck to tap into a cardiovascular market projected to reach $7.2 billion by 2027.
This diversification into cardiovascular treatments adds another layer of stability for income investors because it reduces top line reliance on oncology. The cardiovascular initiatives also serve as a catalyst for both capital appreciation and increased cash flows, all of which combine to support further dividend growth.
Is Merck Stock Cheap?
Merck is trading at a discount to fair value and is cheap according to analysts who have a price target substantially higher at $136.56 per share.
With a strong balance sheet, manageable debt, and a well-covered dividend yield of almost 3%, Merck combines both income and value into one.
But arguably what makes Merck most attractive at this point is the value play with so much upside to fair value.
Indeed, the investment in groundbreaking treatments that range from mRNA vaccines to cardiovascular innovations suggest that Merck’s future is brighter than its current stock price reflects.
Analysts project over 28.8% upside potential based on its current valuation in addition to a price-to-earnings ratio of around 19x, far below the industry average.
As the market begins to pay more attention to the value of Merck’s pipeline and the strength of its financials, the stock has the potential to re-rate significantly higher. For investors looking for a blend of both income and growth, Merck may very well be just be the perfect balance of both.
Putting it all together, with a secure dividend, a pipeline of future growth drivers, and a strong financial standing, Merck appears too cheap to ignore.