I want to tell you about an opportunity I recently came across with shares of Merck & Co., Inc., which appear to be trading at a significant discount today... Merck & Co., Inc. - stock ticker MRK - is a leading global pharmaceutical company that produces a range of medicines, vaccines, and animal healthcare products. It's possibly one of the best stocks to buy now.
The US is the company’s largest market, accounting for over 40% of worldwide sales. Some of the company’s key drugs include Keytruda, Januvia, Gardasil, and ProQuad. Keytruda, their wonder cancer drug, is the company's most important product. It's by far the top-selling drug in their portfolio.
This single drug made up almost 30% of the company's worldwide sales for FY 2020. That compares to nearly 25% of company revenues for FY 2019. So this drug is becoming a larger piece of a growing pie. The company's biggest product is also one of its fastest-growing products. That's a great position to be in. Also, Keytruda isn't only Merck's best-selling drug. At almost $15 billion in sales for FY 2020, it's one of the top drugs on the planet - second only to Humira. And it's forecasted to be the best-selling drug in the world by the middle of this decade.
They've already increased their dividend for 10 consecutive years.
The five-year dividend growth rate is 6.3%, which is something they've been pretty consistent with. Indeed, the most recent dividend increase, announced in November, came in at 6.6%. This growth comes attached to the stock's current yield of 3.4%. That yield, by the way, is 50 basis points higher than the stock's five-year average yield. And the dividend remains protected by a payout ratio of 43.7%, using adjusted FY 2020 EPS. This is a very appealing combination of yield and growth. I consider the "sweet spot" for a dividend growth stock to be a yield of between 2.5% and 3.5%, backed by a mid-single-digit (or better) dividend growth rate.
This stock is right there.
Simply put, this company is, in many ways, better today than it's ever been. With Keytruda going stratospheric, the company will have the capability to produce dividend raises that are higher than they were in the past. I'm assuming a very small acceleration in dividend growth, which is not unreasonable when looking at the totality of the business. The DDM analysis gives me a fair value of $111.80.
Morningstar rates MRK as a 4-star stock, with a fair value estimate of $100.00. CFRA rates MRK as a 4-star "BUY", with a 12-month target price of $90.00. We have a small range here. Averaging the three numbers out gives us a final valuation of $100.60, which would indicate the stock is possibly 30% undervalued.
Here's the bottom line, guys: Merck & Co., Inc. is a high-quality company that has one of the best-selling and fastest-growing products in its industry. The fundamentals are great, and they're only getting better. With a market-beating yield, strong dividend growth, a moderate payout ratio, 10 consecutive years of dividend raises, and the potential that shares are 30% undervalued, this might be one of the very best deals in the market for dividend growth investors.
Video Length: 00:11:58
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