3 Reasons Merck Should Be Bought On Dips

Jun.18.12 | About: Merck & (MRK)

For a number of reasons, Merck and Company, Inc. (NYSE:MRK) might be the perfect stock to buy on dips. Shares of this pharmaceutical giant have performed solidly over the past few months, even at times when the markets have shown extreme volatility. The global economy is showing signs of weakness, and because investors are desperately looking for income in a low interest rate world, shares of Merck are likely to perform much better than most stocks. Here are 3 reasons why investors should be considering shares of Merck on any significant dips:

1. Merck's product line is relatively recession resistant. This could become increasingly important as the global economy is showing signs of a slow down, and even the chance for a depression in certain areas. Unemployment rates of over 22% are becoming common in certain European countries, and if contagion spreads, it could pull down the rest of the world. Pharmaceutical and healthcare companies tend to perform well in tough times because consumers will give up many luxuries before basics like healthcare. Companies like Merck also tend to do well in times of inflation because historically, pharmaceuticals have pricing power and drug prices can be raised over time. If the Federal Reserve is eventually successful in re-inflating the economy, an investment in Merck could be a solid way to add inflation protection to a portfolio.

2. Merck has been reporting solid financial results. For the first quarter of 2012, Merck earned $1.74 billion, or 56 cents a share. However, excluding special charges, earnings were even higher at 99 cents per share. The company has reduced expenses in order to mitigate the potential for reduced revenues from patent expirations. Merck has a healthy pipeline which includes potential treatments in either phase 2 or 3 for allergies, cancer, insomnia, hepatitis, psoriasis, and a number of other indications. These products could fuel growth in the future.

3. Merck's dividend yield is about 4.4%. This is well above the average stock in the S&P 500 Index which yields barely over 2%. Plus, since Merck is expected to earn about $3.81 per share, the annual dividend of $1.68 per share is easily covered. This low payout ratio gives the company plenty of room to increase the dividend in the future. In December, the company raised the dividend from 38 cents to 42 cents per quarter, so it could be prepared to announce another increase later this year.

Merck shares have been moving higher and that trend is likely to continue because it has a stable source of revenues and a yield that will beat many other investments. In the event of a significant market decline, the stock is likely to show relative strength and that is another reason the shares are so attractive in uncertain times. Investors should consider buying shares on any dips, and holding for the dividend and growth potential.

Key Financials For Merck (from Yahoo Finance):

  • Current Share Price: $38.79
  • 52-Week Range: $29.47 to $39.50
  • Dividend: $1.68 which yields 4.4%
  • 2012 Earnings Estimate: $3.81 per share
  • 2013 Earnings Estimate: $3.69 per share
  • P/E Ratio: about 10 times earnings

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, and no plans to initiate any positions within the next 72 hours.