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Summary

  • LLY is among stocks with a high yield and low volatility suitable as an alternative to bonds.
  • LLY's risk to key revenue streams result in an unappealing valuation for bond refugees.
  • LLY's dividend stability is unattractive given near-term earnings pressure will likely keep the dividend in check and dividend safety measures at elevated levels.

Recently, Citi Equity Research released an updated list of global bond refugee stocks. Stocks with higher dividends and lower volatility as an alternative to bond investments. Among companies making the cut is Eli Lilly (NYSE:LLY), with a current dividend yield of 3.2%. Below, we continue our review of LLY in Part X of this series.

Glyndon Park Bond Refugee Recommend Actions:

Overall Bond Refugee Rating: Avoid

Valuation: Avoid

Dividend Stability: Unattractive

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Background

LLY develops and manufactures pharmaceutical products operating in two segments - human pharmaceuticals and animal health. LLY can best be described as in transition. LLY will likely see revenues under pressure from the loss of two key drugs losing patent protection. LLY has a robust pipeline of later-stage drugs that may neutralize losses to generic competition. LLY has taken aggressive actions to reduce its cost structure.

Valuation

LLY has a market capitalization of $77.8 billion, enterprise value of $87.8 billion, and trades at 16.5 times trailing earnings. LLY trades at 18.6 times forward earnings, indicating a decline in expected earnings year-over-year. Analysts expect LLY earnings to grow at an anemic 2.2% annually over the next five years.

LLY trades at a premium to the S&P 500 on both a trailing and projected basis. LLY trades at a discount to the healthcare sector on a trailing basis, however, with declining earnings, LLY trades at a premium to the sector on a forward basis.

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We rate LLY as Avoid, based on bond refugee criteria that stresses relative value and stability of income.

  • LLY's loss of key revenue streams make earnings less predictable and shares appear overvalued on a forward basis.

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Dividend Stability

LLY has a long track record of dividend payments. We note that a long history of annual dividend increases ended in recent years, with no increases since. On a financial basis, LLY's debt stands at 4.6 times EBITDA. The current payout ratio is 45%.

We rate LLY's dividend stability as Unattractive.

  • Dividend growth is likely to be anemic, if any increases are seen at all.
  • Debt is significant relative to EBITDA, which is at risk of decline with key revenue streams at risk and new opportunities dependent on approvals.
  • Payout ratio is conservative, but may increase due to declining earnings.

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Sources:

Yahoo Finance

Wall Street Journal

S&P

Source: Eli Lilly: Evaluating Dividend Stocks As An Alternative To Bonds