Merck & Co., Inc. (MRK) Stock Is a Good Investment (According to Merck)

Page 1 of 2

Merck & Co., Inc. (NYSE:MRK) just can’t get enough of its stock. And the pharma wants it now.

The company announced Tuesday after the close that it had set up an accelerated share repurchase agreement with Goldman Sachs Group, Inc. (NYSE:GS) to buy $5 billion worth of Merck stock. The agreement calls for Goldman Sachs to deliver 99.5 million Merck shares at current market prices — about $4.7 billion at current prices — with the rest based in a weighted average of the price of Merck stock during the program that’s scheduled to end no later than Nov. 25.

Merck & Co., Inc.Through April, Merck & Co., Inc. (NYSE:MRK) repurchased $772 million worth of Merck stock this year. The purchases are part of a $15 billion stock repurchase that Merck announced earlier this month and the remaining part of a $5 billion stock program from 2011.

Merck actually borrowed money to finance the repurchase. It’s not like it couldn’t afford to make the purchase with cash on hand; at the end of the first quarter Merck had a nest egg of $13 billion. But much of that cash is likely overseas.

Is Merck stock really cheap?
Merck & Co., Inc. (NYSE:MRK) is guiding for adjusted EPS between $3.45 and $3.55. At the midpoint, its P/E is 13.5. If you flip that number over — earnings divided by price — you get the earnings ratio of 7.4%, meaning that essentially every dollar Merck spends buying back shares yields 7.4% because it removes shares from the EPS equation.

The company also doesn’t have to pay the dividend — currently 3.7% — on Merck stock that it buys, so that increases the return on the repurchases.

The bonds that Merck & Co., Inc. (NYSE:MRK) sold to pay for the buyback carry interest rates between 0.7% and 4.15%. There are notes due in 2016 and 2018 that have a floating interest rate, but it seems safe to assume that they’re less than 4% at this point.

The buybacks certainly looks like a good move for Merck. It can use the money it would have spent on dividends to pay the interest on the bonds and increase its EPS in the process. That should, in theory, increase its value.

Better use?
The buybacks are a good move, but they might not be the best use of Merck & Co., Inc. (NYSE:MRK)’s cash. It’s possible that Merck could get a higher return by buying other companies to boost EPS by increasing earnings rather decreasing share count. As it struggles with falling revenue from generic competition, Merck stock could use a boost.

Amarin Corporation plc (ADR) (NASDAQ:AMRN) would be a good fit with its lipid-lowering drug, Vascepa. Merck sells cholesterol-lowering Zetia and combo products, so the overhead to market an additional cardiovascular drug would be pretty minimal. Amarin Corporation plc (ADR) (NASDAQ:AMRN) is looks cheap at $1 billion, although the strength of its patents is a potential issue and may be the reason why no one has bought the company yet.

Page 1 of 2

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!