Merck & Co., Inc. (NYSE:MRK) has pleased shareholders over the past 10 years, by paying out dividends. The stock currently pays out a dividend yield of 2.7%, and has a market cap of US$209b. Does Merck tick all the boxes of a great dividend stock? Below, I'll take you through my analysis.
5 checks you should do on a dividend stock
Whenever I am looking at a potential dividend stock investment, I always check these five metrics:
- Is it paying an annual yield above 75% of dividend payers?
- Has its dividend been stable over the past (i.e. no missed payments or significant payout cuts)?
- Has dividend per share risen in the past couple of years?
- Is its earnings sufficient to payout dividend at the current rate?
- Will the company be able to keep paying dividend based on the future earnings growth?
Does Merck pass our checks?
The current trailing twelve-month payout ratio for the stock is 82%, which means that the dividend is covered by earnings. In the near future, analysts are predicting lower payout ratio of 39% which, assuming the share price stays the same, leads to a dividend yield of 2.9%. However, EPS should increase to $4.07, meaning that the lower payout ratio does not necessarily implicate a lower dividend payment.
When assessing the forecast sustainability of a dividend it is also worth considering the cash flow of the business. A business with strong cash flow can sustain a higher divided payout ratio than a company with weak cash flow.
If there is one thing that you want to be reliable in your life, it's dividend stocks and their constant income stream. MRK has increased its DPS from $1.52 to $2.2 in the past 10 years. During this period it has not missed a payment, as one would expect for a company increasing its dividend. These are all positive signs of a great, reliable dividend stock.
Relative to peers, Merck produces a yield of 2.7%, which is high for Pharmaceuticals stocks but still below the market's top dividend payers.
Considering the dividend attributes we analyzed above, Merck is definitely worth keeping an eye on for someone looking to build a dedicated income portfolio. Given that this is purely a dividend analysis, I recommend taking sufficient time to understand its core business and determine whether the company and its investment properties suit your overall goals. Below, I've compiled three pertinent factors you should further research:
- Future Outlook: What are well-informed industry analysts predicting for MRK’s future growth? Take a look at our free research report of analyst consensus for MRK’s outlook.
- Valuation: What is MRK worth today? Even if the stock is a cash cow, it's not worth an infinite price. The intrinsic value infographic in our free research report helps visualize whether MRK is currently mispriced by the market.
- Other Dividend Rockstars: Are there better dividend payers with stronger fundamentals out there? Check out our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.