The trifecta of a company with above-average growth prospects and above-average starting income at a below-average valuation is incredibly potent. It's also quite rare to find such a stock.
But pharmaceutical company Merck (MRK 2.42%) seems to fit the bill. Let's dig deeper and discuss four reasons why the pharma stock is arguably a no-brainer buy-and-hold candidate over the long haul because it offers growth as well as income that makes it appealing to multiple types of investors.
Reason 1: Merck has an enviable product portfolio
Merck is best known for its top-selling cancer drug called Keytruda, which is on pace to exceed $20 billion in net sales in 2022. But with six other medicines or vaccine franchises and its COVID-19 antiviral therapeutic Lagevrio each on track to surpass at least $1 billion in net sales this year, the company's portfolio is more than just the most dominant cancer therapy on the planet.
Merck's net sales climbed 13.7% year over year to reach just shy of $15 billion in the third quarter. This was mostly driven by double-digit percentage net sales growth from Keytruda and the company's human papillomavirus vaccine (HPV) franchise Gardasil, as well as a $436 million contribution from Lagevrio.
Merck posted $1.85 in non-GAAP (adjusted) diluted earnings per share (EPS) for Q3, a jump of 3.9% over the year-ago period. This less-than-stellar growth was the result of a nearly 300-basis-point year-over-year decline in non-GAAP net margin to 31.4% during the quarter. In addition to a decline in profitability, Merck's outstanding diluted share count edged 0.2% higher over the year-ago period to 2.5 billion shares. These factors explain how the company's adjusted diluted EPS lagged behind net sales growth in the quarter.
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Reason 2: Merck's pipeline is deep
Astute investors would raise concerns over Merck's concentration risk from Keytruda. And with the mega-blockbuster cancer drug's $5.4 billion in Q3 net sales comprising 36.3% of Merck's $15 billion in overall sales for the quarter, this is a valid worry.
Fortunately, the company has well over 100 potential new drugs currently under development in clinical trials. These projects are well-diversified across therapeutic areas, including oncology, cardiovascular disease, and neurosciences. As these potential drugs make their way to the market via product launches, this should offset the expected drop-off in Keytruda's net sales that will begin once its patent expires in 2028. In the meantime, analysts anticipate that Merck's adjusted diluted EPS will compound at 11.1% each year over the next five years.
Reason 3: Merck has a safe and market-beating dividend
Another reason investors should consider buying Merck is its 2.8% dividend yield, which outpaces the S&P 500 index's 1.6% average yield. Besides Merck's products and pipeline that support this payout, the dividend is also well-covered.
The stock's dividend payout ratio will come in at around 37% in 2022, which leaves Merck with plenty of available capital to fund future business growth and debt repayment as well as fund further dividend hikes. Shareholders should expect to see many more dividend raises like the most recent 6.2% raise. This is arguably a nice mix of starting income and future growth potential.
Reason 4: Merck stock is discounted
Thanks to its strong business performance and investors flocking to income stocks, Merck's stock soared 30.2% year to date. But even at the current $100 share price, Merck is still a bargain.
Merck's forward price-to-earnings (P/E) ratio of 13.3 is only slightly higher than the drug manufacturer industry average forward P/E ratio of 11.9. Given that Merck's annual earnings growth potential of 11.1% is far superior to the industry average of 6.5%, the stock arguably deserves an even higher premium over its peers.
