Merck and Company, Inc. (NYSE:MRK) shares were trading around $48 in October, but like many dividend stocks, it has experienced a meaningful pullback of about 10%. As a leading manufacturer of vaccines, pharmaceuticals and related health products, it has a stable source of revenues and can be considered to be a relatively defensive holding for investors. Here are four reasons why Merck shares could be perfect for dividend investors:
1. Merck has significant growth potential in vaccines and new drug treatments. It already has Afluria for influenza virus, Proquad for measles, mumps, rubella and varicella, Gardasil for human pampilloma virus, Zostavax for zoster, and many more. Merck is seeking to expand in this and other areas in order to boost growth rates and to offset patent expirations on other products. For example it is looking at treatments for psoriasis and lupus and Merck has an exclusive license and research collaboration agreement with Idera Pharmaceuticals (NASDAQ:IDRA). This agreement provides that the two companies will "research, develop and commercialize vaccine products containing Idera's TLR7, 8 and 9 antagonists in the fields of oncology, infectious diseases (like lupus and psoriasis) and Alzheimer's disease." Psoriasis is a chronic inflammatory skin disease that afflicts about 7.5 million Americans and about 15 million people worldwide. This disease not only looks bad cosmetically, but it also causes severe itching pains. The estimated size of the psoriasis drug market is expected to be worth about $7.4 billion and lupus to be worth over $2 billion in 2020. These are the types of markets that could provide significant revenue growth in the future. Growth can lead to a higher share price and rising dividends.
2. Pharmaceutical and healthcare products are relatively recession resistant and with the global economy still seeing a potential debt crisis and other issues, investing in companies with stable revenues is important. In a weak economy, consumers are likely to cut back on non-essentials, but not drugs or healthcare. Pharmaceutical companies are also likely to do well in times of inflation as these companies can raise prices to keep up with inflation.
3. Merck shares offer an above average yield of 3.8%. That beats most stocks as the average yield for the S&P 500 Index (NYSEARCA:SPY) is just about 2%. Merck has been paying dividends for many years and it has been slowly but surely increasing the payout.
4. Merck has been reporting solid financial results. For the third quarter of 2012, Merck reported non-GAAP earnings of 95 cents per share and worldwide sales of $11.5 billion. It also expects to make a few new product submissions including Suvorexant for insomnia and Odanacatib for osteoporosis.
Like any pharmaceutical company Merck could have downside risk due to patent expirations, generic competition, litigation and clinical failures. It has managed these challenges successfully in the past. Merck has a strong balance sheet with about $18 billion in cash and around $19 billion in debt. It is a large and well diversified company, so it appears well-positioned to absorb most downside risks and take it in stride. With a solid pullback in the stock, an above average dividend yield and a stable product line, Merck shares are worth considering now.
Key Data Points For Merck From Yahoo Finance:
Current Share Price: $44.60
52-Week Range: $34.86 to $48
Dividend: $1.68 per share which yields 3.8%
2012 Earnings Estimate: $3.80 per share
2013 Earnings Estimate: $3.69 per share
Data is sourced from Yahoo Finance. No guarantees or representations are made. Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MRK, IDRA over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.