The S&P 500 rally in recent weeks has erased over half of the index's losses. Yet the S&P 500 is still down 13% year to date.
Many high-yield dividend stocks have fared much better in the market downturn. One is Merck's (MRK 0.96%) stock, which has surged 20% higher in 2022. This raises the following question: Is the stock still a buy for dividend investors? Let's take a dive into Merck's fundamentals and valuation to answer this question.
The business is growing quickly
With a $230 billion market capitalization, Merck is the fifth-largest pharma company in the world. The company's mega-blockbuster known as Keytruda is the top-selling cancer drug on the planet.
On July 28, Merck released its financial results for the second quarter ended June 30. Unsurprisingly, the drugmaker topped analysts' expectations for net sales and non-GAAP (adjusted) diluted earnings per share (EPS) during the quarter.
Merck reported $14.6 billion in net sales in the second quarter, which equates to 28% year-over-year growth. This came in ahead of the average analyst net sales forecast of $13.9 billion for the quarter. How did the company beat the analyst net sales consensus for the eighth quarter out of the past 10 quarters?
The biggest contributor to Merck's net sales growth during the second quarter came from the anti-viral COVID-19 treatment called Lagevrio. The drug added $1.2 billion to Merck's net sales, which was a new source of revenue compared to the year-ago period.
Due to additional indications and strong market share, Keytruda experienced 25.8% year-over-year net sales growth in the second quarter. This helped the drug's net sales grow by nearly $1.1 billion to $5.2 billion for the quarter.
And last but not least, the human papillomavirus (HPV) vaccine franchise named Gardasil logged 35.7% net sales growth over the year-ago period. Net sales surged more than $400 million higher to $1.7 billion during the quarter.
Merck recorded $1.87 in adjusted diluted EPS for the second quarter, which was more than a tripling year over year. This was comfortably above the average analyst adjusted diluted EPS prediction of $1.69. And it also represented the eighth quarter of the past 10 quarters that Merck matched or exceeded the analyst consensus for adjusted diluted EPS.
Aside from a higher net sales base, Merck's non-GAAP net margin soared 1,880 basis points higher over the year-ago period to 32.5% in the second quarter.
Thanks to its 116 programs in different stages of clinical development, lofty adjusted diluted EPS growth should continue for the foreseeable future. In fact, analysts believe Merck's adjusted diluted EPS will grow at 11.1% annually through the next five years.
A healthy dividend with room to grow
Merck's impressive earnings growth potential is just the start of why income investors would love the stock. Its solid starting income is yet another reason. Merck's 3% dividend yield is double the S&P 500 index's 1.5% yield.
With Merck's dividend payout ratio poised to be 37.4% in 2022, the company should have the flexibility to hike its payout over time. That's why I would be surprised if Merck's dividend growth was any less than the high single digits annually over the next several years.
The valuation is a bargain
Merck's current $91 share price appears to be a great buying opportunity for investors.
This is because the stock's forward price-to-earnings (P/E) ratio of 12.5 is slightly below the pharmaceutical industry's average forward P/E ratio of 13.4. For a stock with above-average growth in its future and a generous dividend, this is an attractive valuation that should lead Merck to outperform the market in the decade ahead.