This Dirt Cheap Dividend Stock is One of the Best Deals in the Market Right Now

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Merck & Co., Inc. (MRK) is a leading global pharmaceutical company that produces a range of medicines, vaccines, and animal healthcare products.

Founded in 1891, Merck is now a $193 billion (by market cap) healthcare behemoth that employs nearly 75,000 people.

The company operates across two reportable segments: Pharmaceutical, 90% of FY 2020 sales; and Animal Health, 10%. Insignificant sales occur in unreported segments.

Their core areas of focus are: diabetes, infectious diseases, oncology, vaccines, and animal health.

The US is the company’s largest market, accounting for over 40% of worldwide sales.

Some of the company’s key drugs include Keytruda, Januvia, Gardasil, and ProQuad.

Keytruda, their marvel cancer drug, is the company’s most important product. It’s by far the top-selling drug in their portfolio.

This single drug made up almost 30% of the company’s worldwide sales for FY 2020. That compares to nearly 25% of company revenues for FY 2019.

What’s exciting about Keytruda is that it’s becoming a larger piece of a growing pie. The company’s top-selling product is also one of its fastest-growing products.

Also, Keytruda isn’t only Merck’s best-selling drug. With almost $15 billion in sales for FY 2020, it’s one of the top drugs on the planet – second only to Humira. The anticipation is for it to be the best-selling drug in the world within a few years.

Based on recent growth, that seems highly plausible: Keytruda sales were up 30% YOY for FY 2020.

Notably, this drug is on patent through 2028 in the US and EU.

Now, the Merck of 2021 does look slightly different than the Merck of 2020.

That’s chiefly because, in June 2021, they completed the spin-off of certain non-core assets into a new company called Organon & Co. (OGN).

However, this will have an immaterial impact on Merck. Organon has a market cap below $10 billion, which is less than 5% of Merck’s market cap.

Merck’s business model is highly lucrative and highly appealing.

After all, global demand for, and access to, quality healthcare is sure to increase over time. The world’s population is becoming larger, older, and wealthier.

Merck has powerful demographic tailwinds blowing its way.

That should translate into more profits and bigger dividends.

Dividend Growth, Growth Rate, Payout Ratio and Yield
The company has already increased its dividend for 10 consecutive years.

With a five-year dividend growth rate of 6.3%, which comes on top of the stock’s yield of 3.4%, the stock offers an appealing combination of growth and yield.

This market-beating yield, by the way, is 50 basis points higher than the stock’s five-year average yield.

And the payout ratio is a low 47.1%, based on this year’s guidance for adjusted EPS at the midpoint.

It’s a well-covered dividend.

I like dividend growth stocks in what I refer to as the “sweet spot” – that’s a yield between 2.5% and 3.5%, paired with a high-single-digit (or better) dividend growth rate.

The dividend growth rate is on the bubble, but the yield is at the high end of that range.

CFRA rates MRK as a 4-star “BUY”, with a 12-month target price of $90.00.

I came out in the middle, but we’re all in general agreement here. Averaging the three numbers out gives us a final valuation of $92.24, which would indicate the stock is possibly 21% undervalued.

Bottom line: Merck & Co., Inc. (MRK) is a high-quality company across the board. It’s, perhaps, positioned as well as it’s ever been. With a market-beating yield, a low payout ratio, inflation-beating dividend growth, 10 consecutive years of dividend raises, and the potential that shares are 21% undervalued, this could be one of the best deals in this market for dividend growth investors.

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