Published Thu, 12 May 2016 23:45 CET by DividendYields.orgThe U.S. pharmaceutical industry is highly concentrated with nearly 50 companies accounting for 80% of total revenues. The profitability of each company depends on the ability to discover, develop and sell new drugs. Typically, larger companies capitalize on their economies of scale in research and development while smaller companies effectively compete in drug specialization for the treatment of specific diseases and in partnerships with large drug manufacturers.
This article discusses three large cap pharmaceuticals trading on the NYSE. Their average price is $65, with an average dividend per share $2.05 and an average dividend yield of 3.20%, in line with the average dividend yield of the industry. In the coming quarters, all three companies are expected to sustain strong operating cash flows as well as strong EPS, enabling them to sustain shareholder value in the form of cash dividends.
AbbVie (NYSE: ABBV) is a Chicago-headquartered drug manufacturer that engages in the discovery, development, manufacturing and sale of pharmaceutical products both in the United States and internationally. AbbVie’s most recognizable products are Humira for the treatment of autoimmune diseases, Imbruvica for the treatment of chronic lymphocytic leukemia, and Viekira Pak for the treatment of genotype 1 chronic hepatitis. AbbVie’s network consists of wholesalers, distributors, government agencies, health care facilities, specialty pharmacies, and independent retailers, whereas the company has a strategic collaboration with Ablynx NV, Alvine Pharmaceuticals, Inc., C2N Diagnostics, Calico Life Sciences LLC, Galapagos NV, and Infinity Pharmaceuticals, Inc.
Q1 2016 Financial Results
In the first quarter of 2016, AbbVie reported positive top-line results. The company demonstrated strong operational sales growth 22.4%, mainly driven by Humira global operational growth of 19% as well as strong growth from Imbruvica, Viekira Pak, and other products in its portfolio.
AbbVie’s Q1 2016 results are as follows:
- Revenues grew 18.2% YoY to $5.96 billion from $5.04 billion
- Gross Profit Margin declined 4.5% YoY to 77.7% from 81.3%
- Total operating expenses grew 9.8% YoY, to $3.68 billion from $3.35 billion
- Operating income grew 35.0% YoY to $2.28 billion from $1.69 billion
- Net income grew 32.5% YoY to $4.63 billion from $4.1 billion
- Operating cash flow grew 34.3% YoY to $2.13 billion from $1.59 billion
The recent acquisition of Stemcentrx is a strategic opportunity for AbbVie to build and reinforce its position in oncology R&D. Stemcentrx’ exclusive tumor platform focuses on cancer stem cell biology and identifies innovative therapeutic objectives. The acquisition is expected to enable AbbVie to enhance its presence in oncology and to build upon its position in hematological oncology.
Dividend Growth & Outlook
AbbVie delivers strong revenues, EPS growth, net income growth and expanding profit margins. In addition, its dividend growth since 2013 is 42.5% or 14.2% annually, suggesting that the company focuses on delivering long-term shareholder value in the form of cash dividends. AbbVie declared an annualized dividend of $2.28 per share, yielding 3.58% at a payout ratio of 68%. Analysts estimate an average EPS of $6.46 through 2019, up 93.4% from the current EPS $3.34 and an average earnings growth of 15.15% per year through 2020.
Eli Lilly (NYSE: LLY) is an Indianapolis-based drug manufacturer that engages in the discovery, development, manufacturing and sale of pharmaceutical products in the United States and internationally. Through its Human Pharmaceutical Products and Animal Health Products segments, Eli Lilly offers a range of medical and neuroscience products for the treatment of major diseases and depressive disorders as well as animal health products.
Q1 2016 Financial Results & Outlook
Revenues reached $4.9 billion, up 4.7% YoY from $4.6 billion, generating a gross profit margin 72.8% from 74.3%, down 2.0% YoY. Excluding the impact of foreign exchange, revenues increased 8% YoY driven by higher volume from new drugs Basaglar, Cyramza, Jardiance, Portrazza and Trulicity as well as by as the takeback of North American rights for Erbitux. Total operating expenses increased 0.7% to $4.15 billion from $4.12 billion. Operating income grew 36.3% YoY to $715.8 million from $525.2 million, whereas net income declined 16.9% to $440.1 million from $529.5 million. In addition, the company’s operating cash flow declined 48.0% YoY to $2.3 billion from $4.4 billion in 2014. Eli Lilly has a low debt-to-equity ratio of 0.54 while its return on assets is 0.22. The company’s strengths can be summarized in its solid financial position, reasonable debt levels and strong return on equity. On the other hand, the company needs to improve its operating cash flow. For the coming years, analyst estimate an average EPS of $4.28, up 97.4% from the current EPS of $2.17. Average earnings growth is estimated at 11.82% per year through 2020.
Dividend Policy and Shareholder Value
During the first quarter of 2016, the company has returned over $500 million to shareholders in the form of dividend payments and has repurchased $300 million of stock, with $2.65 billion remaining on its $5 billion stock repurchase plan. Dividend growth since 2000 is 96.2% or 6.0% annually, suggesting that Eli Lilly remains focused on its strategic objective of providing a robust dividend and returning shareholder value. Eli Lilly declares an annualized dividend of $2.04 per share, yielding 2.65% at a payout ratio of 94%. Although the high payout may be concerning as the company retains practically no earnings for future growth initiatives, we should consider that the EPS of $2.17 includes costs that are no carried through the coming quarters. Eli Lilly has a high payout ratio since December 2014, but high EPS estimates through 2019 will bring the payout to a more manageable percentage of overall profits.
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Merck (NYSE: MRK) is a New Jersey-headquartered drug manufacturer that offers healthcare solutions in the United States and internationally. Merck offers therapeutic and preventive drugs for the treatment of major diseases as well antibiotic and anti-inflammatory drugs for the treatment of infectious and respiratory diseases, fertility disorders and more. The company’s network consists of drug wholesalers and retailers, hospitals, government agencies, physicians, distributors, veterinarians, animal producers, and managed health care providers.
Q1 2016 Financial Results
Revenues declined 1.2% YoY to $9.3 billion from $9.4 billion, generating a gross profit margin of 61.6%, down 2.5% YoY from 63.2%. Excluding foreign exchange headwinds, revenues grew 3%, whereas the reduction of operations in Venezuela has negatively impacted Q1 revenues by approximately $240 million. Total operating expenses declined 4.4% YoY to $7.6 billion from $8.0 billion in Q1 2015. Operating income grew 16.5% YoY to $1.67 billion from $1.44 billion and net income reached $1.13 billion from $952 million, an 18.2% YoY increase. Merck reported an impressive operating cash flow growth of 443.8% to $12.4 billion from $2.2 billion in 2014. Merck’s low debt-to-equity ratio suggests effective debt management while the company’s beta is 0.20. Overall, Merck makes a safe investment due to strong cash flows, EPS growth and expanding profit margins.
Dividend Strength & Outlook
Merck declared an annualized dividend of $1.84, yielding 3.37% at a payout ratio of 113%. Although the payout ratio is high, we should consider that the company’s reported GAAP EPS is $1.63, which means that Merck has earned $1.63 per share, inclusive of M&A costs, restructuring costs, and other extraordinary expenses over the trailing 12 months. If these costs are excluded, the company’s non-GAAP EPS is $3.53 per share over the trailing 12-month period, yielding a payout ratio of 52%. Compared to AbbVie and Eli Lilly, Merck has the lowest EPS with all these costs included. Moreover, Merck’s dividend growth since 2000 is 35.3% or 2.2% annually, which suggests that Merck’s dividend is sustainable and all the costs included in the GAAP EPS are not long-term costs to negatively affect the company’s operation in the coming quarters. This is further sustained by the fact that the company’s total debt grew 24% YoY to $26.5 billion from $21.4 billion so that short-term liabilities are covered. Analysts’ consensus estimates an average EPS of $4.01 through 2019, up 146.0% from the current EPS of $1.63, which is expected to lower the company’s payout ratio down to 46%.