A Global Health Care Giant Doling Out a Massive Dividend

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on a diversified global health care giant: Merck & Company Incorporated (NYSE: MRK).

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The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Merck is global health care company which offers solutions through prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. Based on market capitalization, Merck is valued at $125.92 billion. Because of the company’s pricing power, Merck possesses a profit margin of 11.94%.

Strengths:

  • Solid Revenue Growth: In 2000, Merck reported revenue of roughly $32 billion; in 2011, the company announced revenue of $48.04 billion, representing year over year annual growth of 3.76%, but future growth is expected to slow considerably with projections placing 2017 revenue at $49.30 billion.  This historic growth has been a result of the consistent offering of new and innovative products
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  • Positive Free Cash Flow Position: In 2013, the company is projected to generate $13 billion of free cash flow, allowing the company to distribute to shareholders or reinvest in their own business
  • Institutional Vote of Confidence: 72.31% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
  • Relatively Low Volatility: Currently, the company carries a beta ratio of 0.32, representing a company trading with considerably less volatility than the overall market, a major upside for long-term investors
  • Dividend: Presently, Merck pays out quarterly dividends of $0.43, which annualized puts the dividend yield at 4.15%
  • Diversified Product Portfolio: Merck possesses a diverse product portfolio with products ranging from vaccines, prescription products, consumer products, and animal health; with major brands including Dr. Scholl’s, Claritin, and Coppertone; with the company’s pharmaceutical portfolio including Nasonex, Alimentary, Zocor, Remicade, NuvaRing, Singulair, and Temodar, and with this diversified product portfolio comes a greater level of security and predictability for investors
  • Net Cash Position: Merck’s $24 billion of cash and cash equivalents outweighs its $23 billion in debt, resulting in a $916 million cash position, a strength of the company
  • Necessity Products: The wide majority of products the company sells are considered necessities, and with this comes a stronger company in times of economic downfall 

Weaknesses:

  • High Valuation: At the moment, Merck carries a price to earnings ratio of 19.13 and a price to sales ratio of 2.66, both of which indicate a company trading with a fairly high valuation
  • Margin Contraction: The company’s profit margin has contracted from 56.73% in 2008 to the current level of 11.94%, and this trend of margin contraction is a major weakness in the company
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Opportunities:

  • Pipeline: Merck’s pipeline includes 15 drugs in phase clinical trials 2, 17 drugs in phase 3, and 3 in regulatory phases, with several possible blockbuster drugs coming up.  This strong pipeline presents incredible opportunity for the company to grow into the future
  • Dividend Growth: Since implementing their dividend program in 1935, Merck has consistently raised their dividend payouts and should continue to do so into the future
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  • Results from R&D Spending: In 2012, the company poured over $8 billion into research and development spending, and any innovations, drugs, or technologies that result from this investment could provide opportunities and spark growth
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  • Acquisitions: In May 2011, Merck acquired Inspire Pharmaceuticals Incorporated, and further acquisitions in the future could introduce new technologies and treatments to the company and present incredible opportunity
  • MK-0524A: This particular drug candidate which has the ability to lower LDL cholesterol, if approved is projected to generate $3-$4 billion in revenue by 2020 if the drug meets all requirements for approval, presenting major potential

Threats:

  • Expiration of Patents: On Aug. 13, 2012, Merck lost its patent rights to the blockbuster drug Singulair, and further patent expirations could severely hurt the company and pose a major threat to revenue growth
  • Legal Issues: Merck is no stranger to legal problems with users of its products, and while these lawsuits are traditionally on a small scale, they still could cut into profits 

Competitors:

Major publicly traded competitors of Merck include Pfizer (NYSE: PFE), Bristol-Myers Squibb (NYSE: BMY), Sanofi (NYSE: SNY), and Johnson & Johnson (NYSE: JNJ). All of these companies operate in the same industry as Merck and compete directly with the company. Pfizer is valued at $200.92 billion, pays out a dividend yielding 3.52%, and carries a price to earnings ratio of 21.66. Bristol-Myers is valued at $60.38 billion, pays out a dividend yielding 3.83%, and carries a price to earnings ratio of 31.72. Sanofi is valued at $126.95 billion, pays out a dividend yielding 3.88%, and carries a price to earnings ratio of 15.89. Johnson & Johnson is valued at $211.06 billion, pays out a dividend yielding 3.20%, and carries a price to earnings ratio of 19.67.

The Foolish Bottom Line:

Financially, Merck is extremely solid. The company possesses historic revenue growth, a positive free cash flow, and a net cash position. The only major weaknesses of the company are its high valuation and trend of margin contraction. Looking forward, Merck has strategically invested in its company and possesses a strong pipeline. All in all, while revenues are projected to be flat in the coming years, and the company will not offer explosive growth to investors, Merck is a steady and solid investment with a growing dividend that should hand investors returns in line with the overall market.


makinmoney2424 has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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