E Merck: This Pharmaceutical Giant Has Significant Upside Potential

Merck was unable to grow its earnings per share between 2011 and 2016, partly due to the expiration of some patents. However, the company has returned to growth mode in the last four years, in which it has grown its earnings per share at a 12.1% average annual rate.

Moreover, Keytruda has exciting growth potential ahead. This drug has multiple growth drivers, as it will be used in an increasing number of countries and its price is likely to rise in the upcoming years. In addition, Keytruda is likely to be applied in more cancer types in the future. It is also important to note that the patent protection of Keytruda is set to expire in 2028, 2030, and 2032 in the U.S., the European Union, and Japan, respectively. It is thus evident that Keytruda will be a major growth driver for Merck in the upcoming years.

On the other hand, as Merck achieved record earnings per share in 2020, it is prudent to be somewhat conservative in future growth estimates. Overall, it is reasonable to expect Merck to grow its earnings per share by approximately 5% per year over the next five years.


Merck spends a significant portion of its revenues on R&D expenses. In the last four years, the company has spent $8.0-$10.0 billion per year on R&D expenses or 21% of its revenues on average. This fact and the lackluster earnings growth in some periods due to patent cliffs and competition help explain the unimpressive dividend growth record of Merck. The company froze its dividend between 2005 and 2011 and grew its dividend by only 2% per year between 2012 and 2017. Nevertheless, Merck has raised its dividend at a decent 4.8% average annual rate over the last decade.

The stock is currently offering a dividend yield of 3.1%. While this yield is not impressive, it is essentially double the yield of the S&P 500 (1.5%). In addition, thanks to the healthy payout ratio of 41% and the strong balance sheet of the company, investors can rest assured that the dividend is safe. Overall, the dividend yield of Merck is not exciting but it is safe and much better than the average yield of the broad market.

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