Merck Won't Yield on Yield

Just about any time a Merck (MRK) executive appears before a microphone, presides over a Webcast or attends a financial or medical conference, he or she is asked how safe the dividend is.

The question has been posed ever since Sept. 30, 2004, when Merck pulled the arthritis drug Vioxx from the market, and every time the New Jersey-based drugmaker says its payment isn't in danger.

However, investors can expect this Q&A to continue, perhaps for years, as long as there's uncertainty about potential liabilities of Vioxx.

Wall Street estimates of those liabilities run as high as $55 billion. But the dividend is only part of the financial dilemma for Merck, which is facing several years of declining earnings per share and sales growth.

Merck doesn't have enough new drugs with large-sales potential to offset the lost revenue from big-sellers going off patent, but don't expect any drastic dividend action soon. Merck still has a healthy credit rating.

The company's balance sheet also has been bolstered, thanks to a law signed by President Bush last year that enables companies to repatriate earnings from foreign subsidiaries at sharply reduced tax rates. Merck is repatriating $15 billion.

Still, there's that nagging question. Merck's yield of 5.1% -- second-highest among its peers -- has been attractive to investors willing to wait out the bad times. They might be waiting a while, according to Albert Rauch of A.G. Edwards.

"Our concern is that it will be a long time for the turnaround -- 2008, or even 2009 or 2010," he says.

Stock Support

Cutting the dividend would scare investors because they might interpret the move to mean that Merck fears big Vioxx litigation losses, Rauch says. Merck hasn't established a reserve for potential liabilities, but it has set aside $675 million just for legal expenses.

Big Pharma's Dividends
Company	Dividend (Per Share Annual Rate)	Share Price Dec. 1	Yield
Bristol-Myers Squibb	$1.12	$21.63	5.20%
Merck	$1.52	$29.68	5.10%
Pfizer	$0.76	$21.38	3.50%
Eli Lilly	$1.52	$51.50	3.00%
Abbott	$1.10	$37.63	2.90%
Wyeth	$1	$41.20	2.40%
Schering-Plough	$0.22	$19.05	1.20%

Right now, the dividend is propping up the stock. Rauch says Wall Street is valuing Merck for its ability to maintain the payout rather than its earnings per share performance. Clearly, a dividend cut would send Merck's shares lower. If the price fell too low, Merck could even become a takeover target, says Rauch, who doesn't own shares and whose firm doesn't have an investment banking relationship with the company.