While even the bluest of blue chip stocks move up and down on a day-to-day basis, the same generally can't be said on the timetable of a decade or more. Investing in quality businesses and sticking with them over time is a proven way to grow richer.
A $10,000 investment in pharmaceutical stalwart Eli Lilly (LLY 4.31%) made 10 years ago would now be worth $79,000 with dividends reinvested. Putting this into perspective, that is leaps and bounds ahead of the $32,000 that the same investment amount put into the S&P 500 index 10 years ago would have turned into with dividends reinvested.
But is Eli Lilly stock still a buy for growth investors? Let's examine the company's fundamentals and valuation to work out an answer to this question.
Q4 results were fine considering the circumstances
With more than 38,000 employees around the world and its products marketed in 120 countries, Eli Lilly is a dominant drugmaker. Aside from Johnson & Johnson, Eli Lilly's $327 billion market capitalization positions it as the biggest pharmaceutical company in the world.
The Indianapolis, Indiana-based business recorded $7.3 billion in revenue during the fourth quarter ended Dec. 31, 2022, which was down 8.7% over the year-ago period. These results aren't nearly as discouraging as you would think they are at first glance.
The U.S. Food and Drug Administration (FDA) pulled Eli Lilly's COVID-19 antibodies therapy emergency use authorization last December. The FDA made this decision on the basis that the antibody wasn't expected to neutralize certain omicron subvariants of the COVID-19 virus.
When excluding COVID-19 antibodies revenue from the company's results, Eli Lilly's revenue edged 5% higher. And that wasn't the only issue that the company faced in the quarter. Thanks to its notable international presence and the robust U.S. dollar, the company experienced a 4% foreign currency translation headwind. Taking this into account, Eli Lilly logged a 10% year-over-year revenue growth rate for the quarter. These results were driven by solid growth from key products such as the type 2 diabetes drug Trulicity, breast cancer treatment Verzenio, and heart failure and type 2 diabetes therapy Jardiance.
Eli Lilly's non-GAAP (adjusted) diluted earnings per share (EPS) dipped 3.7% over the year-ago period to $2.09 during Q4. Tight cost management helped the company's non-GAAP net margin expand by 130 basis points year over year to 25.9% in the quarter. Paired with a 0.5% reduction in the diluted outstanding share count, this explains how Eli Lilly's adjusted diluted EPS declined at a slower rate than revenue for the quarter.
Looking out over the next five years, the drugmaker appears to have a promising future. Eli Lilly has dozens of compounds currently in differing stages of clinical development, which will push revenue upward. That's why analysts are projecting that the company will generate 22.6% annual adjusted diluted EPS growth through the next five years. For context, that is more than triple the drug manufacturer industry average earnings growth forecast of 6.4%.
Tremendous dividend growth lies ahead
LLY Dividend data by YCharts
Eli Lilly's 1.3% dividend yield isn't too far below the S&P 500 index's 1.6% yield. Yet, the company's dividend growth prospects run circles around those of the S&P 500. Eli Lilly just delivered its fifth consecutive dividend hike of at least 15%, which is an impressive feat that should continue in the years ahead.
This is supported by the fact that Eli Lilly's dividend payout ratio will clock in at approximately 53% in 2023. Since this payout ratio leaves enough funds for the company to execute on its growth ambitions and strengthen its balance sheet, the dividend could reasonably keep growing as much as profits for at least the medium term.
The stock isn't cheap -- but for good reason
After rocketing 44% higher over the last year, Eli Lilly's shares certainly aren't as cheap as they used to be. Eli Lilly's forward price-to-earnings ratio of 29.3 is only about double the drug manufacturers industry average of 14.1.
But with the approval of the diabetes medicine Mounjaro last May and its industry-tripling earnings growth potential, the stock still looks like a buy for growth investors.
