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
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 44 percentage points in 21 months Learn how!

Lists

The Top 10 States With Fastest Internet Speeds

10 Best Places to Visit in USA in August

Top 10 Cities to Visit Before You Die

Top 10 Genetically Modified Food In the US

15 Highest Grossing Movies Opening Weekend

5 Best Poker Books For Beginners

10 Strategies Hedge Funds Use to Make Huge Returns

Top 10 Fast Food Franchises to Buy

10 Best Places to Visit in Canada

Best Summer Jobs for Teachers

10 Youngest Hedge Fund Billionaires

Top 10 One Hit Wonders of the 90s

Fastest Growing Cities In America

Top 10 U.S. Cities for Freelancers

Top 9 Most Popular Free iPhone Apps

Top 10 Least Expensive Private Business Schools in the US

Top 15 Most Expensive Countries in the World – 2014

Top Businesses to Invest In

Top 5 Things You Might Be Doing Wrong With Your Business

Top 5 Strategic Technology Trends in 2014

Top Rags to Riches Stories

Parenting Behavior That Promotes Future Leaders

Top 5 Mistakes Made by Small Businesses

Top 5 Most Common and Potentially Devastating Financial Blunders

Top 5 Highest Paying Jobs for Web Designers

Top 6 Most Respected Professions that Also Pay Well

Top 5 Pitfalls Investors Should Avoid

Top 6 Lawyers and Policy Makers Under 30

Top 6 New Year’s Resolutions for Entrepreneurs

Top 7 Locations to Check in on Facebook

Top 5 Mistakes made by Rookie eBay Sellers

Top 7 eBook Publishers in 2013

Top 6 Health Industry Trends in 2014

5 Lessons for Entrepreneurs from Seth Godin

Top 5 Success Tips from Jordan Belfort – the Wolf of Wall Street

Best Master’s in Finance Degree Programs

Top 6 Earning Celebrities Over 50

The most expensive sports to play

Top 7 Earning Celebrities Under 25

Best 7 Online Courses to Take: Free Finance MOOCs

Top 6 Bad Habits that Promote Failure

20 Most Valuable Soccer Teams in the World in 2013

12 Most Expensive Countries for Foreign Students

Top 30 Most Influential Women in the World

Top 20 Most Expensive New Year Eve Shows

Top 5 Best Vocational Careers

Top 10 Jobs for 2014 by Salary Gain (Predictions)

Top 5 Digital Trends for 2014

Top 6 Things You Can Do To Increase Your Productivity

Top 9 Trending Smartphones in 2013

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 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!