This Day On The Street
Continue to site right-arrow
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

In These Turbulent Times, Reach for Merck

NEW YORK ( TheStreet) -- Despite hints of U.S. economic stability and the willingness of politicians to bail out the European Union, I'm not convinced global markets will remain calm for long. Add to this the likelihood of near-zero interest rates for at least the next few years, and it makes sense to own stocks with big dividends. In health care, that means large cap pharmaceuticals.

I've been a fan of Pfizer ever since the 2009 acquisition of Wyeth (I discussed my view most recently in May.) Although I still think Pfizer should be a core holding, here's another to consider: Merck.

Admittedly, I'm late to the party. Merck shares are up 42% over the past year. Even so, I think there's upside from here. Let's review the key issues.

Earlier this month, Merck's multi-blockbuster asthma drug Singulair lost U.S. patent exclusivity. As the market is flooded with inexpensive generics, U.S. sales of the branded version will rapidly disappear. European patents for Singulair expire early next year, although ex-U.S. generic erosion curves tend to be somewhat more gradual.

The Singulair patent "cliff" is not a surprise to Wall Street, but that doesn't mean it won't have an impact on the company's income statement. Despite retaining "rest of world" -- non-U.S. and non-European -- exclusivity, I expect nearly 75% of the drug's $5.5 billion in worldwide sales to disappear over the next six months.

Importantly, Singulair's operating profit margin likely far exceeds the company's other major franchises, since it doesn't require as much marketing as less well-entrenched products. As a result, the loss of exclusivity hurts both sales and profit margins. That's the downside to a dominant pharmaceutical franchise, and explains why investors often underestimate the impact of a generic "cliff." In Merck's case, Wall Street analysts and investors seem to have modeled Singulair's erosion well enough that the impact has been correctly built into consensus earnings.

I like Merck for two reasons. First, the company pays a 3.8% dividend, slightly higher than those of Pfizer or Johnson & Johnson. Even with repeated R&D screw-ups, like those at competitor Eli Lilly, investors seem unwilling to let the dividend yield creep much above 4.5%. That provides a valuation floor for Merck around $37 per share.

1 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Try it NOW
Only $9.95
Try it NOW
14-Days Free
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
MRK $57.90 -0.76%
AAPL $125.29 -0.85%
FB $83.06 -0.16%
GOOG $553.72 0.31%
TSLA $191.20 0.33%


DOW 17,887.22 -89.09 -0.50%
S&P 500 2,077.91 -8.33 -0.40%
NASDAQ 4,925.7890 -21.6520 -0.44%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs