Investing tends to be concerned with future results, and that means the stock market is often forward-looking. The answer to whether the market has appropriately valued a particular stock in the present depends on what its future holds. What its future holds tends to depend on whom you ask.
With its share prices up 24% year to date, it appears that the market thinks Eli Lilly's (LLY 1.19%) future looks pretty good. Its performance trounced the comparative 16% gains of the S&P 500 index so far in 2023. But is the future still good for this pharmaceutical giant? Or has all the positive sentiment already been priced into the stock?
Let's unpack three reasons the stock still looks like a buy for dividend growth investors and one reason they might want to stay on the sidelines.
1. Eli Lilly's existing drugs can power near-term growth
Eli Lilly's $434 billion market capitalization makes it the largest pharmaceutical company in the world. This is even ahead of the longtime leader, Johnson & Johnson (valued at $417 billion).
Lilly's crowning as the new titan of the pharmaceutical industry has been for good reason. The company has six medicines on track to top $1 billion each in revenue for 2023. That includes the type 2 diabetes medication Trulicity, which continues to grow at a double-digit clip and is on pace to surpass $8 billion in revenue in 2023. The breast cancer therapy Verzenio is gaining market share, which helped its revenue for the first quarter of 2023 soar 60% year over year to over $750 million.
But the most powerful growth catalyst for the company for at least the next few years will be Mounjaro. Since its launch less than a year ago, the type 2 diabetes drug has already grown its latest quarterly revenue base to $568.5 million. The medicine is gearing up for what it expects will be a Food and Drug Administration approval to treat obesity later this year. Along with growing acceptance from doctors and patients to treat type 2 diabetes, Mounjaro could ultimately bring in tens of billions of dollars of peak annual revenue for Eli Lilly.
For these reasons, analysts anticipate that the company's total revenue will grow by 9.9% in 2023 to $31.4 billion and another 19.5% in 2024 to reach $37.5 billion.
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2. Eli Lilly's drug pipeline could deliver lasting growth
Eli Lilly has what it takes to sustain this massive growth, with dozens of projects currently in various stages of clinical trials. Mirikizumab could become a blockbuster in treating ulcerative colitis.
But the drug with the most promising sales potential is arguably its diabetes and obesity candidate retatrutide. According to the results from its phase 2 clinical trial, the medicine helped patients to lose a stunning 24.2% of their weight after 48 weeks of treatment. That's far better than any other drug, commercially developed or in development, which might mean retatrutide could one day achieve peak sales even greater than Mounjaro.
That's probably why analysts expect 24.6% annual growth in adjusted diluted earnings per share (EPS) over the next five years. For context, that is about triple the drug industry's average annual earnings growth outlook of 8.6%.
3. Eli Lilly has a modest dividend with rapid growth potential
Stacked against the S&P 500 index's 1.6% dividend yield, Eli Lilly's 1% yield on its dividend initially seems uninspiring. But with the company's superb growth prospects and a dividend payout ratio projected to be less than 52% in 2023, Lilly is positioned well to generate outsize dividend growth in coming years. This could make the stock an excellent buy for patient investors seeking encouraging future income.
Fair warning: Total returns will depend on Eli Lilly's business performance
The only factor that could end up holding Eli Lilly's stock back is the high expectations Wall Street has for it. This explains why it has been given a forward price-to-earnings (P/E) ratio of 37.8, which is nearly triple the drug industry's average forward P/E of 12.9.
If an investor is confident that Eli Lilly can clear the high bar of analysts, the stock could still be a buy. But as a word of caution, the company's failure to do so could lead to a re-rating of the stock's valuation multiple and weigh on future returns.
