Merck & Co., Inc. (NYSE:MRK) has been trying to generate more value for its shareholders via its share buyback program. Recently, it has also had a repurchase agreement to buy back its shares held by Goldman Sachs, with a total transaction value of as much as $5 billion. It was reported that the transaction would be expected to finish by the end of November within this year. Since the beginning of the year, Merck & Co., Inc. (NYSE:MRK)’s share price performance has closely matched with the S&P 500, gaining by more than 14%. Is Merck a good buy at its current price? Let’s find out.
Singulair recent patent expiration
Investors have been concerned about Merck & Co., Inc. (NYSE:MRK)’s patent expiration of its Singulair, the respiratory product in August last year. Indeed, after the patent expiration, Singulair sales have fallen significantly. In the first quarter 2013, Singulair generated only $337 million in sales, a decline of nearly 75% from the sales of $1.34 billion in the first quarter last year. In Q1 2013, diabetes drug Januvia and cardiovascular product Zetia became the two biggest revenue contributors, with $884 and $629 million, respectively, in revenue. Zetia’s patent will expire in 2017, and the patent of Januvia will expire in 2022 at the earliest.
Actually, key patent expirations will be faced by drug companies sooner or later. All companies have to go through these tough times. One of its main competitors, Pfizer Inc. (NYSE:PFE), recently had to go through this with the expiration of cholesterol drug Lipitor in November 2011. In 2012, Pfizer saw Lipitor’s sales drop by as much as 59% to only $3.95 billion. The biggest revenue contributor of Pfizer Inc. (NYSE:PFE) in 2012 was Lyrica, the patent of which will expire in 2018.
A juicy dividend yield but high payout ratio
In the past ten years, Merck & Co., Inc. (NYSE:MRK) has managed to grow its top line. Since 2003, it has more than doubled its revenue, from $22.5 billion to nearly $47.3 billion. However, the net income declined a bit, from $6.83 billion to nearly $6.17 billion during the recent 10 year period. Income investors might like Merck because of its high dividend yield. At $46.70 per share, Merck & Co., Inc. (NYSE:MRK) is worth more than $141 billion. The market values Merck at around 8.9 times EV/EBITDA. The dividend seems juicy at 3.7%. Even though Merck has been consistently paying dividends, it raises its dividend payments at quite a slow rate. The dividend rose from $1.46 per share in 2003 to only $1.69 dividend per share in 2012. Furthermore, the payout ratio is quite high now. In 2012, it paid out more than 84% of its earnings in dividends.
Pfizer Inc. (NYSE:PFE) offers a bit lower dividend yield. It is trading at $27.20 per share, with the total market cap of $193.1 billion. It is valued a bit cheaper at 7.8 times EV/EBITDA. At the current price, Pfizer pays its shareholders a dividend yield at 3.5%. However, investors would feel safer with the lower and more reasonable payout ratio. In 2012, it pays out only 43% of its earnings in dividends.
Merck has returned more cash to shareholders via buybacks. In the past four quarters, it spent more than $1.16 billion to repurchase its shares on the market, pushing the cumulative treasury stock amount to more than $25 billion. Pfizer Inc. (NYSE:PFE) has been busy buying back its shares. Since the second of quarter last year, Pfizer Inc. (NYSE:PFE)’s treasury stock amount has grown from $34.86 billion to more than $44.8 billion.