Patent expirations are the price we pay for intellectual property rights, and Eli Lilly & Co. (NYSE:LLY) has been no stranger to the burden of patent losses. In lockstep with the struggles of its peers, Lilly lost patent protection for a handful of its most lucrative drugs, and saw revenue decline 17% year over year in the most recent quarter.

LLY Chart

LLY data by YCharts

Yet despite those ugly numbers, investors with an eye on the future have anticipated a return to earnings growth and have sent the stock on an impressive run over the last two years. In a pair of previous articles I laid out some bullish and bearish arguments that could influence investments in Eli Lilly as the company heads into a pivotal time in its storied history. With shares just a few percent off their 10-year high, it's worth asking if now's the time to invest in Eli Lilly, or if the optimism is already baked in. 

For comparison, we'll stack Eli Lilly up against peers AstraZeneca (NYSE:AZN) and Bristol-Myers Squibb (NYSE:BMY), with comparable market caps, target markets, and patent woes. Sliding earnings make trailing valuation metrics difficult to interpret, so instead lets look at forward projections of earnings growth five years out, when the meat of each late-stage pipeline should be matured. After all, Foolish investors care most about long-term growth potential. 

 

Five-Year Earnings Growth (per annum)

Five-Year PEG Dividend Yield Payout Ratio
Eli Lilly 0.45 50.8 3.1 62
AstraZeneca 0.6 26.3 2.6 175
Bristol-Myers Squibb 13.25 2.6 2.9

88

Source: Yahoo!Finance

Lilly as a growth stock?
As I've argued before, Lilly's pipeline is one of the least impressive in the business. By comparison, Bristol-Myers has an incredibly valuable asset with its PD-1 inhibitor nivolumab, which has shown excellent results in treating a wide range of cancers. Like its close competitor Merck, Bristol has a huge opportunity for label expansion and dual therapy partnerships in nivolumab, which is likely to drive growth for years to come.

A quick glance at the numbers supports that idea. Whereas analysts expect Lilly's earnings to grow at less than 1% annually for the next five years, Bristol-Myers' is expected to grow north of 13%. So, while Lilly and Bristol-Myers both trade at forward P/E ratios in the 20s, Bristol's earning potential gives it an overwhelmingly more reasonable PEG ratio of 2.1. On the other hand, Lilly's PEG ratio of 50.8 suggests that growth expectations are more than priced into the stock already.

Lilly as a dividend stock?
On the surface, Lilly looks like a fairly strong dividend play. It boasts a respectable yield of 3.1%, and pays out just 62% of its earnings as dividends. AstraZeneca, on the other hand, has been forced to pay out more than it earned in the last year to maintain its 2.6% dividend. While less extreme, Bristol-Myers payout ratio and yield are also less favorable than Lilly's.

However, dividend investors don't only care about the current yield. Sustainable dividend growth is equally as important to a winning dividend investment. Looking at historical dividends gives us a better idea of how these companies got where they are. 

LLY Dividend (Annual) Chart

LLY Dividend (Annual) data by YCharts

The three companies have taken disparate approaches to capital allocation in the face of the patent cliff. While AstraZeneca paid investors to wait out its earnings slump, Bristol-Myers reserved some cash and recently juiced its dividend as its growth prospects come to fruition. Lilly took the third approach: put things on hold. Its dividend has not changed since 2009, and with free cash flow tumbling and uninspiring growth estimates it's hard to imagine a dividend raise in the near future.

Lilly as a Foolish investment?
I'd have to say no. At least not right now. Lilly has a very long history of innovation, and I wouldn't count it out as a serious contender in the future of the drug development business. Today, though, there are too many questions about Lilly's growth and dividend management to make it an attractive investment.

Seth Robey has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.