Dividend growth stocks have generated higher annual total returns than all other stocks (i.e., non-dividend-paying stocks and other dividend-paying stocks) from 1973 to 2021. And this appears to still be the case in 2022.
As a case in point, pharma stock Eli Lilly (LLY -1.90%) has only fallen 1% year to date. This is significantly better than the S&P 500's 11% decline during that time. And better yet, I believe Eli Lilly can continue to outperform the S&P 500 going forward. Let's dive deeper into the stock's fundamentals and valuation to find out why.
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A portfolio of successful therapies
Eli Lilly reported remarkably strong revenue and earnings growth in 2021. The company recorded $28.3 billion in revenue during 2021, which works out to a 15.4% year-over-year growth rate compared to 2020. How was a mega-cap stock like Eli Lilly able to produce expectation-defying growth?
The answer lies within Eli Lilly's portfolio of blockbuster therapies. These include the type 2 diabetes medicine Trulicity, psoriatic arthritis and plaque psoriasis drug Taltz, breast cancer drug Verzenio, and COVID-19 antibodies. A 16% increase in volume within Eli Lilly's entire portfolio and a 1% favorable foreign currency translation were more than enough to offset a 2% decline in realized prices across the portfolio.
The four highlighted products from Eli Lilly accounted for $12.3 billion or nearly half (43%) of the company's revenue in 2021. Revenue for these products in 2021 grew at a blistering 42% rate vs. 2020 and made up the vast majority of Eli Lilly's sales growth during the year.
Going further down the income statement, Eli Lilly's non-GAAP (adjusted) diluted earnings per share (EPS) surged 20.4% higher year over year to $8.16. Besides the increased sales base, a 100-basis point increase in Eli Lilly's non-GAAP net margin to 26.3% helped to explain the company's robust earnings growth.
Up-and-coming indications will drive future growth
Eli Lilly grew like a weed last year. But what's even more encouraging is that the company's steady growth doesn't look like it will be fading away anytime soon.
In fact, I would argue that analysts' forecast of 9% annual earnings growth over the next five years looks like a conservative estimate. Eli Lilly's earnings grew at a 19% annual clip in the five years prior, so a more than 50% drop-off in the earnings growth rate seems unlikely. That's because the company's pipeline of blockbuster drug candidates is the envy of its industry.
Eli Lilly's pipeline has dozens of indications at different stages of clinical trials. The most promising drug in Eli Lilly's pipeline is tirzepatide. It's widely anticipated that tirzepatide will be the best-in-class type 2 diabetes drug. The next-gen drug will build on the strength of Trulicity, which is why analysts expect tirzepatide to reach $10 billion to $12 billion in annual peak sales.
Eli Lilly's rheumatoid arthritis drug Olumiant, licensed by Incyte, could also eventually be approved by regulatory agencies to treat the autoimmune disease known as alopecia areata. I estimate that it could pull in $600 million in annual sales for Eli Lilly after royalty payments to Incyte.
Impressive dividend growth should continue
Eli Lilly has managed to grow its dividend at an 11.3% annual rate over the past five years, which is a rather high rate for such a mature company. But can this admirable dividend growth continue?
Eli Lilly's dividend payout ratio in 2021 was 41.7%. This gives the company plenty of flexibility to complete share buybacks, repay debt, and acquire acquisition targets to secure future growth. When also considering Eli Lilly's high likelihood for low-double-digit annual earnings growth over the medium term, the stock should have no problem maintaining similar dividend growth going forward.
Double-digit annual dividend growth and a market-matching 1.4% dividend yield make Eli Lilly's stock attractive for dividend growth investors.
A high-quality stock for long-term investors
Eli Lilly has the characteristics of a fundamentally healthy pharma stock. The company has not only a drug portfolio to drive growth in the near term but also a drug pipeline to sustain that growth in the long term.
This is reflected in Eli Lilly's stock valuation. Its shares are trading at a forward price-to-earnings (P/E) ratio of about 27, which is well above the industry average of 11. But Eli Lilly's five-year annual earnings growth rate of 19% is far and away higher than the industry average of 8%. And since Eli Lilly's industry-crushing growth is positioned to continue in the years ahead, I believe the stock's valuation is justifiable for long-term investors.
