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Eli Lilly & Co. (LLY) discovers, develops, manufactures, and sells pharmaceutical products worldwide. LLY is the 10th largest pharmaceutical company in the world and operates in the healthcare sector.

Dividend Reliability

A stock's dividend safety and reliability is determined by its dividend payment history, its current financial health, and its volatility in relation to the market as a whole. A total of 5 points are available:

  • The number of Consecutive Dividend Payments -- 10 to 25 Years = 1 Point; More than 25 Years = 2 Points
  • Free Cash Flow Payout Ratio -- Less than 80% = 1 Point
  • Debt to Total Capital -- Less than 75% = 1 Point
  • Beta < 1.0

Dividend Growth

Although growth isn't as important when we are buying for current income, we still want a history of increases as well as demonstrated ability to keep up with inflation. A total of 3 points available.

  • Number of Consecutive Dividend Increases - 10 to 25 Years = 1 Point; More than 25 Years = 2 Points
  • 3 year avg dividend growth rate > Inflation (3%) = 1 Point

Fair Value

If we're going to buy a stock, we don't want to purchase it when its overvalued. We will evaluate an income stock's valuation by its P/E and Yield. Total of 2 points available:

  • Current P/E < avg 5 Year P/E = 1 Point
  • Current Yield > avg 5 Year Yield = 1 Point

Factor

What we want

Actual

Points

Dividend Reliability

Consecutive dividend's paid > 10 years

126 years

2

Free Cash flow payout ratio < 80%

39%

1

Debt to total capital < 75%

27%

1

Beta < 1.0

0.37

1

Dividend Growth

Consecutive dividend raises > 10 years

0

0

3 Year Avg dividend growth rate > inflation (3%)

0.7%

0

Fair Value

Current P/E < Avg 5 Year P/E

10.6 > 5.1

0

Current Yield > Avg 5 Year Yield

4.8% < 5.0%

0

Total Score

5/10

Strengths: Profitable psychiatric and cancer drugs.

Weaknesses: Profits from its drug pipeline may not be able to replace profitable expiring drugs.

Opportunities: Older population. Rising health spending.

Threats: Regulated business. Cheap, generic alternatives. Patent expirations upcoming on some of its more profitable drugs (Cymbalta, Humalog, and Evista). Intense competition.

Conclusion

LLY scored 5 points in dividend reliability, 0 points in dividend growth, and 0 points in fair value for a final score of 5/10 points, which rates it as a Hold, revisit within a year.

LLY was a strong dividend grower up until 2009. In fact, until then the company had raised its dividend for 42 consecutive years. The all-cash acquisition of ImClone Systems in 2008 likely contributed to the flat dividend growth the following year. Although the company has a low FCF payout ratio and debt to total capital, there have been no dividend increases since February 2009. This appears to be a sign that management is not confident that its drug pipeline will be able to replace current profits of drugs that are nearing expiration. Although it does not appear as if the current dividend is in jeopardy, the lack of growth the past three years would keep me from allocating for dividend income purposes.

Click to enlarge image.

Disclaimer: This analysis is intended to give investors a general overview of a stock's dividend income highlights that I feel are important. The analysis can be used to help determine whether further, deeper examination should be done. As always, investors should do their due diligence before buying a stock.

Source: Eli Lilly Dividend Income Analysis: Current Dividend Safe, Growth Is An Issue