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Why Are Hedge Funds In Love With Eli Lilly (LLY)?

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Eli Lilly and Co (NYSE:LLY) is one of the largest drug companies in the world. In this article, we’ll take a closer look at why many hedge funds are long the drug company. We’ll also use the latest 13F data to see how the select group of hedge funds that we follow traded the stock in the second quarter.

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David Smart/

David Smart/

Eli Lilly and Co (NYSE:LLY) has a portfolio of established blockbuster drugs including Cialis, Humalog, and Zyprexa, a collection of promising new drugs such as Trulicity, Jardiance, and Ixekizumab, and a robust pipeline of potential drugs including Abemaciclib, solanezumab, and Baricitinib. Although Eli Lilly’s older slate of drugs make it fantastically profitable, it is the company’s newer drugs and pipeline that analysts are most excited about. Analysts estimate that Ixekizumab could do $2 billion in annual peak sales, and that Baricitinib could do as much as $1.6 billion a year. Throw in the potential of solanezumab for the mega-indication of Alzheimer’s, and it’s not hard to see why analysts believe that Eli Lilly will grow its EPS by an average of 12.95% a year for the next five years, better than most of its peers.

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The anticipated earnings growth makes Eli Lilly a dividend favorite for hedge funds, who value future earnings growth just as much as current earnings. Although the company isn’t cheap with a forward P/E of 19, Eli Lilly could outperform its peers and the market if the EPS growth predictions hold up. Eli Lilly’s dividend could also be primed for future hikes as the company’s cash flow and EPS grow. Currently, Eli Lilly pays a quarterly dividend of $0.51 per share, good for a 2.62% annual dividend yield. Given the payout ratio of 57%, and the relatively inelastic demand for essential medications, Eli Lilly’s dividend is safe. As its EPS grows, many investors believe that its dividend will rise by around the same rate, meaning that it could grow at a double digit rate as well.

Eli Lilly reported solid results for its second quarter, with in-line EPS of $0.86 on sales of $5.4 billion (up by 8.4% year-over-year). Guidance was very much in-line as well, with the company’s management reiterating its previous full-year guidance of adjusted EPS of $3.50-to-$3.60 on revenue of $20.6 billion-to-$21.1 billion. The company is still on track to launch drugs or molecules for at least two new indications/line extensions per year for the next seven years and fully expects to announce annual dividend raises each year through 2020.

We’ll analyze how hedge funds traded Eli Lilly in the second quarter on the next page.

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