The big drug manufacturers traditionally pay big dividends. These companies generally have impressive margins and are able to create substantial liquidity which they in turn distribute to shareholders. I have chosen the following four U.S. drug manufacturers because they all yield a dividend of over 4%. This article will focus on dividend history, how these companies have been able to pay such large dividends, and what to expect from their dividend this year. I will make recommendations to buy, sell, or hold based on this information.
Pfizer Inc. (NYSE:PFE)
From 2001 until the end of 2008, Pfizer steadily grew its dividend on an incremental basis. In 2009, Pfizer initiated a 37.5% dividend cut and further decreased that by $0.08 into 2010. It will pay at a $0.22 quarterly rate in March of this year, amounting to a $0.88 annualized rate that is $0.16 higher than in 2010. This $0.88 rate equates to a 4.2% yield, which is down from its five-year average of 4.7%. This is sustained with a 63% payout ratio.
Pfizer's most recent margins are nothing to brag about. In the past ten years, the gross margin has remained rather stable, varying from about 75% to at most 85%. The trailing-twelve-month (TTM) gross margin is currently 77.06%. Its 2010 operating margin of 13.89% was 42.8% lower than the 2008 margin but has rallied a bit, amounting to a 16.58% TTM margin.
In 2010, the free cash flow was an unfortunate turnout, coming in at about 35% below the 2009 amount. However, because of a surge in the cash flow from operations, the free cash flow has rebounded to $19.6 billion, or 27.6% higher than in 2009.
Pfizer potentially plans to sell its infant-nutrition unit and is in the process of creating a joint venture with a leading pharmaceutical company in China, Zhejiang Hisun, to manufacture and commercialize off-patent pharmaceutical products in China and global markets.
I believe that Pfizer will raise its dividend up to the $0.96 range this year. However, it needs to concentrate on bringing profitability up to higher levels and to continue improving cash flow in order to do this. As a shareholder, I will continue to hold this stock. For potential investors, I recommend buying this stock right now.
Merck & Company Inc. (NYSE:MRK)
Since 2005, Merck has been paying a $1.52 annual dividend. However, Merck recently announced an increased quarterly dividend payment. In January, Merck paid a $0.42 dividend which equates to a $1.68 annualized dividend. This $1.68 rate translates into a 4.4% yield, which is up from the five-year average of 4.1%, with a 77% payout ratio.
Merck has recognized a slump in profitability. 2009 and 2010 proved to be lagging years in terms of margins. Operating margins in 2009 and 2010 were 8.7% and 5.15%, respectively, down from the 2008 operating margin of 21.19%. Largely because of "other" income, the 2009 net margin was unaffected by this slip, amounting to 47.03%. However, because of no more additional contributions, Merck reported a 2010 net margin of 1.87%. The TTM net margin showed slight improvement coming in at 8.84%.
On a brighter note, cash flow looks great. Into 2010, operating cash flow took a 219% year-over-year spike. Free cash flow subsequently increased by 373% into 2010. The TTM reports show even further cash flow improvement.
While Pfizer is looking to break into new markets in China, Merck is making itself know in Brazil by creating a joint venture with co-owners of Supera Farma, a Brazilian Pharmaceutical company and will own 51%. According to management, this is a key step forward in Merck's strategy to enter into new, key markets while creating greater global access to its products.
While profitability has dropped, revenue increased by over 67% on a year-over-year basis into 2011. Merck also substantially increased its research and development expense in 2011 while incurring similar inclines in selling and administrative expenses. However, these expenses can translate into growth. If Merck succeeds in breaking into new markets while efficiently allocating funds to create new products, profitability will eventually improve. Being that Merck sustained a $1.52 annualized dividend for several years and recently increased its quarterly payment, I believe that it will maintain the $1.68 annualized rate through 2012. If Merck manages to maintain high levels of revenue and can subsequently translate this into earnings growth, it is likely to announce an increase in 2013. Based on these factors, I strongly believe this stock is a buy right now.
Bristol-Myers Squibb Company (NYSE:BMY)
Bristol-Myers has also paid a rather steady dividend over the past several years. In 2001, it paid a $1.11 dividend and in 2002 through 2006, it paid a slightly higher $1.12 dividend. From then on, there were slight incremental increases up to the 2010 rate of $1.29. In 2011, it paid $0.33 for three consecutive quarters and is now most currently paying a quarterly dividend of $0.34, summing to a $1.36 annual rate. The 4.3% yield slightly lower than the 4.6% five-year average. It pays out 61% of earnings to maintain this rate.
Bristol-Myers is traditionally profitable. The past few years have resulted in above-average margins. Since 2009, the gross margin and operating margin have been around 73% and 29%, respectively. The 29% operating margin was almost 50% higher than in 2008. The net margin was an untraditional 52.82% in 2009, but this was due to an extraordinary contribution from discontinued operations. It is currently around 15%.
The cash flows have shown improvement. Bristol-Myers has consistently grown its operating cash flows in recent years while decreasing capital spending. This of course translates into an improvement in free cash flow. In fact it reported year-over-year increases of 79%, 19.7%, 20.6%, and 22% in 2007, 2008, 2009, and 2010, respectively. This growth in free cash flow is much more significant than growth in dividend payment.
On a much bleaker note, Bristol-Myers recently received a subpoena from the U.S. attorney's office requesting information concerning sales and marketing of its second-best-selling drug Abilify. Abilify was second to Plavix in its portfolio, generating $2.8 billion in revenue in 2011. Also, Plavix will lose its patent this year.
So, taking everything into consideration, I do not expect a dividend increase this year. I only expect the company to maintain its current rate because it has the cash to do so. As a shareholder, I will hold for now. However, I am recommending potential investors avoid this stock for now.
Eli Lilly & Company (NYSE:LLY)
Over the last ten years, Eli Lilly has been paying a rather steady dividend. Since 2009, it paid a $1.96 annual dividend and will continue on this path by paying a $0.49 quarterly dividend in March. At the current rate, Lilly is paying a 5.1% dividend yield, the highest among its U.S. counterparts. This is slightly above its five-year high of 4.7%. This is sustained by a payout ratio of 50%. Lilly pays the highest dividend, at the highest percent of share price, with the lowest payout ratio.
From 2002, Lilly reported an annual incremental increase in revenue. During this time, the gross margin remained stable, coming in anywhere from about 76% to slightly above 80%. Also, aside from a 2008 slip, the operating margin remained in the 20-30% range. The 2010 operating margin was about 28%, the highest in five years. The 2010 net margin was reported at an eight year high of about 22%.
Lilly has not recently purchased or issued any common stock. It exclusively pays dividends, which most recently amounted to 37.4% of free cash flow. Lilly has the profitability and the cash flow to maintain and further grow its dividend. Because Lilly hasn't announced a payment increase in the past two years and continues to grow its business while maintaining its dividend with a mere 50% payout, I expect a rise in payment this year. I recommend buying this stock right now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.