Not all dividends are created equal. At first glance a high dividend yield may look nice, but all too often it means a problem is lurking around the corner for a business. Looking at Merck’s 3.8% dividend yield in isolation only tells half of the story, which is why investors need to have an understanding of how the market perceives a company prior to buying a stock. We can do this by comparing a few financial multiples, like price to earnings, to its peers in the industry.
Up to this point, we’ve looked at Merck’s dividend in the past, and we’ve also seen how its stock is being perceived by the market today. However, the most important factor to consider when understanding a dividend’s future is where the company’s cash flow is heading. It’s hard to generate more cash without growing sales, so let’s take a look at what industry analysts are expecting for Merck’s revenue growth relative to peers this year.
From patent expirations to pipeline delays Merck & Co., Inc. (NYSE:MRK) is dealing with a variety of headwinds. However, the most significant is last August’s U.S. patent expiration of Singulair, an asthma drug that generated about $5.5 billion in sales in 2011. With about 10% of sales exposed to generic competition, revenue growth will be hard to come by for the next year or two. Cost cutting will help drive some earnings growth, but until the top line begins growing, don’t expect any meaningful boost in Merck’s dividend.
The article Does Merck’s Dividend Have Room to Soar? originally appeared on Fool.com.
Brenton Flynn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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