Former Fidelity mutual fund manager Peter Lynch is known for his insightful quotes that can be helpful to investors. One of my favorites is, "It only takes a handful of big winners to make a lifetime of investing worthwhile."
Pharmaceutical behemoth Eli Lilly (LLY -2.63%) proves this point all too well. A $10,000 investment in the stock 10 years ago would now be valued at $91,000 with dividends reinvested. For context, that is triple the $30,000 or so that the same investment would have earned in the S&P 500 over the same time.
This raises a question: Does Eli Lilly have what it takes to make shareholders richer in the next 10 years? Let's consider the company's fundamentals and valuation to get an answer.
Eli Lilly's growth story remains intact
With an employee head count approaching 40,000 and its products sold in 120 countries, Eli Lilly is a global company. In fact, its $381 billion market capitalization makes it the largest drugmaker on the planet besides Johnson & Johnson.
Total revenue dropped 10.9% year over year to $7 billion for the first quarter (ended March 31). A decline in the top line seems like the last thing you'd want to see from a company in your portfolio if you are a growth investor, right? But things aren't nearly as bad as they look.
That's because the Food and Drug Administration discontinued the Emergency Use Authorization for Lilly's COVID-19 antibody therapy in December. This hurt first-quarter revenue by nearly $1.5 billion. Factoring the COVID antibody therapy out of the mix, revenue grew by 10% in the first quarter.
These results were mostly made possible by volume growth from the company's next-generation type 2 diabetes drug Mounjaro, its type 2 diabetes medicine Trulicity, and cancer drug Verzenio. Perhaps most impressively, Mounjaro was able to double its revenue from the fourth quarter of 2022 to almost $570 million during the first quarter.
And the best is arguably yet to come for Mounjaro. It is expected to be approved for weight loss as soon as the end of this year. That could position it to become one of the best-selling drugs of all time.
The company's adjusted diluted earnings per share (EPS) dropped 38.2% from the year-ago period to $1.62 for the first quarter. Profits were weighed down by higher research and development expenses stemming from late-stage assets, as well as marketing, selling, and administrative expenses for new product launches.
This lowered the adjusted net margin by 940 basis points to 21% during the quarter, and caused the adjusted diluted EPS to decrease much faster than total revenue for the quarter.
Analysts expect the company's dozens of pipeline indications to produce 23.3% annual growth in adjusted diluted EPS over the next five years -- almost four times the drug industry's outlook for average annual earnings growth of 6.4%!
Image source: Getty Images.
Its modest dividend has massive growth potential
Eli Lilly's 1.1% dividend yield doesn't seem like much compared to the S&P 500's 1.6%. But it's important to note that the company's dividend has soared more than 130% in the past 10 years, with most of that growth coming in just the past five years.
LLY dividend data by YCharts
The dividend payout ratio is poised to come in below 53% in 2023, which is quite sustainable. This would allow the company to retain the capital needed to complete acquisitions and repay debt. That's why I believe annual dividend growth in the teen percentages can persist for the foreseeable future.
A well-deserved premium valuation
Lilly has a bright future, which is probably why the shares have roared 37% higher in the last 12 months. After such a jarring rally, you'd expect them to be too expensive. But their forward price-to-earnings ratio of 34 is justified even if the drug industry's average is around 13. That's because the company's growth potential is nearly quadruple the industry average.
So the stock looks like a buy at the current price -- and a strong buy on any corrections.
