Merck Won't Yield on Yield

He figures Merck can maintain its current dividend from existing cash flow as long as the Vioxx liabilities stay below $25 billion. Anything higher and the dividend would be at risk, he says. Merck lost a Texas state court case in August, then won a New Jersey state court case in November. The first federal court case is under way in Houston. As of Sept. 30, more than 6,400 U.S. lawsuits have been filed alleging that Vioxx caused injury or death.

During Merck's Nov. 28 conference call to explain its restructuring plan, one analyst asked if Merck might raise the dividend. Judy Lewent, the company's chief financial officer, repeated the mantra that Merck has sufficient cash flow to support the dividend at its current level.

For many years, Merck investors could count on a dividend increase annually. Most recently, a penny a share was added every October -- but not this year, with the quarterly payout remaining at 38 cents.

Not Schering-Plough

The only Big Pharma dividend-cutter in recent memory was Schering-Plough (SGP Quote) in 2003, and its financial condition was dramatically worse than Merck's is now. Merck's long-term credit rating is still much better than Schering-Plough's.

A few months after Fred Hassan took over as Schering-Plough's CEO in April 2003, he chopped the quarterly dividend to 5.5 cents from 17 cents as part of a massive cost-cutting program. The payout remains at 5.5 cents.

"The previous dividend level is not realistic given the company's reduced revenues, the need to conserve cash for inherited regulatory and legal issues, and the need to invest for future growth," Hassan said on Aug. 21, 2003, in his dividend announcement.

At the time, the yield was about 4.4%, and investors had been getting yearly dividend increases, even as the company's financial condition was deteriorating.