When you're on the hunt for a great long-term dividend stock, you may want the perfect stock. The Dividend Aristocrats or Dividend Kings may come to mind first — companies that have proven they offer a high dividend for decades. Dividend Aristocrats must show evidence of dividend increases for at least 25 consecutive years.
What's in it for you if you do invest in Merck & Co.? Let's take a look at the history of Merck, what makes a company a good dividend pick and the pros and cons of investing in Merck for the long term.
History of Merck & Co. Inc.
Headquartered in Kenilworth, New Jersey, Merck & Co. Inc. (NYSE: MRK) operates as a health care company that expands its reach worldwide. The company produces and distributes human health pharmaceutical products that include treatments:
- Oncology
- Immunology
- Neuroscience
- Virology
- Cardiovascular treatments
- Diabetes
- Vaccine products
The company's animal health segment develops and manufactures veterinary pharmaceuticals, vaccines and health management products and services.
Merck & Co., Inc., was established in 1891 and in 1899, the first Merck Manual was published. In 1936, the company manufactured Vitamin B. In 1944, Merck rushed 4.18 billion units of penicillin to World War II battlefields. In 1987, a cholesterol-lowering statin was brought to the market and in 1996, an HIV treatment received a swift review and approval by the Federal Drug Administration. The company now partners with AstraZeneca PLC, Bayer AG, Eisai Co. Ltd., Ridgeback Biotherapeutics and Gilead Sciences Inc. to jointly develop and commercialize long-acting treatments for HIV.
In 2006, the first vaccine for cervical cancer was born as well as an oral treatment for diabetes. The company developed immunotherapy for cancer treatments in 2014 and the Ebola vaccine in 2019. In 2021, Merck partnered with Johnson & Johnson to expand the manufacturing and supply of the COVID-19 vaccine.
The company continues to serve the following:
- Drug wholesalers
- Retailers
- Hospitals
- Government agencies
- Managed health care providers
- Physicians and physician distributors
- Veterinarians and animal producers
What Makes a Good Long-Term Dividend Pick?
Merck & Co. Inc.'s stock has significantly outperformed its peers this year, in key part due to Keytruda's $4.8 billion in sales and its COVID-19 antiviral pill, Molnupiravir, with sales of $3.2 billion.
However, it's still a good idea to evaluate Merck & Co. against other long-term dividend picks by doing your own research and evaluating Merck & Co. against other companies. Check out the following criteria:
- Past earnings: Evaluating past earnings and future earnings projections with a consistent history of rising earnings over many years, you may earmark the stock for a purchase for the long term. However, it's worth mentioning that historical performance doesn't always guarantee future performance.
- Debt: Worthwhile dividend stocks typically stick to paying off debt. Check out a company's debt-to-equity ratio and make sure it's lower than 2.00.
- Sector trends: What are other companies in the same sector doing? If other companies are lagging behind the company you're considering in terms of overall performance, you might have a gem on your hands if the company you've considering investing in outperforms other companies.
- Dividend payout ratio: Take the annual dividends per share (DPS) divided by earnings per share (EPS) or total dividends divided by net income. A company that pays out less than 50% of its earnings in the form of dividends is considered stable and the company has the potential to raise its earnings over the long term.
- Dividend coverage ratio: You can divide a company's annual EPS by its annual DPS by dividends to its common shareholders using its net income over a specified fiscal period. The higher the dividend coverage ratio, the better.
- Free cash flow to equity: After all expenses and debts have been paid, the free cash flow to equity ratio measures the amount of cash that could be paid out to shareholders. You can calculate it by subtracting expenditures, debt repayment and working capital from net income and adding net debt.
- Net debt to EBITDA: EBITDA stands for earnings before interest, taxes and depreciation. Net debt to EBITDA divides a company's total liability less cash and cash equivalents by its EBITDA. Stick to a company with a lower ratio when measured against its industry average or similar companies.
Pros and Cons of Investing in Merck
Let's take a look at the pros and cons of investing in Merck:
Pros:
- Possible acquisition: Merck may acquire Seagen Inc. in a deal value that could exceed $40 billion. As long as it is approved, it could enhance its cancer drugs portfolio, including Seagen's headliners, Padcev, Tukysa, and Adcetris, each a potential blockbuster drug that may help increase the business.
- Dividend: Merck offers reliable dividends and headlined dividend growth per year on average over the past 10 years, even though it hasn't always increased its dividend yearly. Currently, the company offers a 2.95% diividend increase.
- Treatment solutions: Known for its high-quality treatments for key diseases, Merck offers a blockbuster portfolio of therapy for a wide variety of drugs, including Keytruda for melanoma and non-small cell lung cancer and Elbasvir and grazoprevir for hepatitis C.
Cons:
- Genergic competition: Merck and Co. may face generic competition and competitive pressure on off-patent drugs Remicade, Zetia, Vytorin and Januvia.
Should You Invest in Merck?
Ultimately, the stock is fairly valued and has already created the building blocks necessary to increase its position in the industry. Merck beat estimates for both earnings and sales driven by its COVID-19 drug, molnupiravir, cancer drugs and HPV vaccines and its animal health products. Keytruda sales growth should drive increased expansion across the world. Furthermore, Merck expects Gardasil sales to double by 2030. Its already-existing therapies should drive long-term growth and continue to boost sales.
However, it's still important to evaluate your long-term goals and needs. Consider your short-, medium- and long-term goals before you choose the right investments for your needs. Only after you consider your total financial picture can you identify whether investing in Merck & Co. Inc. makes the most sense for you.
Learn more: Dividend Stocks for Retirement: Can You Live Off Dividend Stocks in Your Golden Years?
