Eli Lilly Dividend Stock Analysis: Too Early for Investors to Panic

Dec. 6.10 | About: Eli Lilly (LLY)

Last week, I presented my dividend stock analysis template. I will play around with it for a few weeks but I had already used the original template to analyze Eli Lilly LLY.

The Company Stock Description:

Founded in 1876, Eli Lilly is now the 10th largest pharmaceutical company in the world. If you don’t know them as a company, the name Cialis, the biggest Viagra competitor, probably rings a bell. So if your wife is happy, it might because of Lilly (that could be a nice tag line, don’t you think?).

Eli Lilly works in the discovery, development, manufacturing and sale of pharmaceuticals. Like many of its competitors, LLY is vertically integrated for maximum control of its products. Interesting fact to mention, LLY is part of the S&P Dividend Aristocrats index. They have been paying dividends since 1885 and have increased their dividend for 42 years in a row.

Stock Graph (click on the images for larger graph)


Dividend Growth Graph


The Company Ratios and Financial Info:

When you look at the numbers presented below, you will notice that most of them converge to a single point; a great buying opportunity. However, there is more to analyzing numbers when you look at a pharmaceutical company!

Dividend Metrics:

  • Current Dividend Yield: 5.37%
  • 5 year Dividend Growth: 5.22%
  • 1 year Dividend Growth: 0%

Company Metrics :

  • Sales Growth: 9.6%
  • Earnings Growth: N/A
  • P/E Ratio: 7.41
  • Margin Growth: 0.97%
  • Payout Ratio: 49.73%
  • Return on Equity: 53.24
  • Debt to Capital Ratio: 16.24%

Stock Metrics:

Ticker: LLY

Price: $34.22

Trading Volume: 7449921

Trend (technical analysis): Trading below 30 days moving average

Upcoming opportunities and dangers:

Back in September 2009, Eli Lilly went through a major restructuring plan involving 5,500 job cuts by 2011, out of 40,500 employees. Along with the job cuts, LLY decided to concentrate on five major department units; oncology, diabetes, emerging markets, established markets and animal health.

The problem with pharmaceuticals is that when you look at their numbers, they don’t tell you the whole story. For example, there is a huge part of the sales generated by LLY coming from a schizophrenia drug (Zyprexa) and its patent expires in 2011… as a result you can predict that sales should drop at that time.

Another important factor to consider is that you are never protected when we talk about pharmaceutical lawsuits. Remember Merck Frost a few years ago? This can happen to any big pharmaceutical company. And it actually happened with Zyprexa about a year ago.

So what we really have to look at is Eli Lilly’s drug pipeline. And this is exactly what concerns me, as Matthew Herper mentioned in the online version of Forbes. In fact, while several patents are about to expire, the drug pipeline is struggling with clogged arteries.

Final Thoughts

Back in 2009, Dividend Growth Investor raised some concerns about LLY in his Eli Lilly stock analysis. While the future doesn’t seem too bright for LLY, this psychiatric drug leader has shown great strengths in marketing its products in the past and they might surprise us again in the future.

While potential dangers such as a weak pipeline and expiring patents make the medium to long term picture darker, I think it’s too early to panic. The company still has a good dividend history with a dividend payout ratio now under the bar of 60%. I still believe they could escape this current turmoil. I will keep it on my watch list to keep an eye on further moves from the company.

Disclosure: I do not own shares of LLY at the moment in my portfolio.