First Look at Dividend Grower Merck (MRK).

Preferred stock: none that I’m aware of.

Bonds: $8.9 billion outstanding.  Some big bonds are coming due in 2015, but they aren’t threatening this year’s dividend.

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DIVIDEND RECORD: Merck paid a $0.03 quarterly dividend in 1987.  The quarterly dividend has grown to $0.42 per share in 2012.  It has increased its dividend 1,300% over 25 years.  Merck is a dedicated dividend grower.

Dividend: $0.42 quarterly

Dividend yield: 4.35%  (Merck becomes a 6% high dividend stock at a price of $28.00 per share)

Dividend payout: 82.8% using recent EPS of $2.03 –OR- 82.3% using average adjusted earning power of $2.04

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EARNING POWER: $2.04 @ 3.04 billion shares

(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)

EPS

Net income

Shares

Adjusted EPS

2007

($1.04)

$3,275 M

2,193 M

$1.08

2008

$3.63

$7,808 M

2,145 M

$2.57

2009

$5.65

$12,853 M

2,273 M

$4.23

2010

$0.28

$859 M

3,120 M

$0.28

2011

$2.02

$6,257 M

3,040 M

$2.06

Merck’s five year average adjusted earnings per share is $2.04

Consider contrarian buying below $16.32 (8 times average adjusted EPS)

Consider value buying below $24.48 (12 times average adjusted EPS)  Merck’s stock price bottomed at $23.45 in April 2009.

Merck (MRK) is currently trading at 18.9 times average adjusted EPS.  This is stock is priced for investment, but is nearing speculative pricing.

Consider speculative selling above $40.80 (20 times average adjusted EPS)

BALANCE SHEET – 44% of Merck’s assets are comprised of goodwill and intangibles ($46.457 billion of $105.128 billion).  From 2003 through 2007 intangible assets only comprised about 4% of Merck’s total assets.  I don’t like so much subjectivity determining asset values.  The price to book value is too high.  The price to tangible book value is astronomical.

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Book value per share: $17.93

Tangible book value per share: $2.65  TBV is found by subtracting goodwill ($12.155 B) and intangibles ($34.302 B) from shareholder equity ($54.517 B) and then dividing by the number of shares (3.04 B)

Price to book value ratio: 2.15 (under 1.0 is good)

Price to tangible book value radio: 14.6

Current ratio: 2.04 latest quarter (over 2.0 is good)

Quick ratio: 0.92 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.28 (lower is better)

Percentage of total assets in plant, property, and equipment: 15.5% (the higher the better)  Current assets account for 31.6%, long term assets 5.46%, and other equity/investments 3.29%.

Working capital trend is way up.  Working capital equals current assets less current liabilities.  Financially strong companies have a positive upward trend.

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CONCLUSION – As usual, the best time to buy MRK in recent years was in April 2009.  It was a value investment back then.  Merck is a steady dividend payer and grower.  The dividend yield is nothing special until the stock takes a beating.  The company is still priced for investment at this time, but it’s getting dangerously close to 20 times average adjusted earnings.  I think it is time to get out of Merck.  Scale out of it above $40.80.  The balance sheet is weak when you look at the price to book value ratio and the tangible book value ratio.  Much of its assets are intangibles.  That in never a good sign.  Pharmaceutical companies are always a the mercy of FDA bureaucrats and their clinical trial approvals.  I don’t like the Sword of Damocles hanging over my investments.  I wouldn’t buy Merck until it is back below $24.48, if at all.

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DISCLOSURE – I don’t own Merck (MRK).

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Published in: on April 10, 2012 at 11:22 pm  Leave a Comment  

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