Merck Announces $10 Billion Buyback, Hikes Dividend By 2.1%

In an effort to enhance its shareholders' value, Merck (NYSE:MRK) declared a 2.1% hike in quarterly dividend to 48 cents from 47 cents per share paid last quarter.

The increased dividend will be paid on Jan 8, 2018 to shareholders of record as of Dec 15, 2017.

The raised dividend rate brings Merck’s annual dividend to $1.89 per share, implying a yield of 3.5%, which is better than the industry average of 2.6%.

Concurrently, the board of directors of Merck also sanctioned a new $10 billion stock buyback plan. Notably, during the first nine months of 2017, the company completed the purchase of $2.3 billion of its equity.

Merck’s financial strength enables it to continue with its repurchase program and initiate dividend payouts. As of Sep 30, 2017, the company’s cash and cash equivalents were $7.9 billion. The increased repurchase authorization and new dividend payouts are expected to boost investors’ confidence in the stock. Merck’s strategy to return wealth to the shareholders demonstrates its growth potential and a stable liquidity position.

Meanwhile, Merck has a global restructuring program in progress, aimed at reducing the cost structure and increasing the company’s efficiency. It intends to decrease the number of manufacturing sites including the animal health one and consolidate other facilities instead. The company expects annual savings of about $4.0-$4.6 billion, once the restructuring program is completed.

Merck has also divested segments like the Consumer Care business so that it can focus on its core areas of expertise.

However, Merck’s shares have declined 6.2% this year so far, underperforming the industry’s16.2% rally. The company has also suffered some notable pipeline setbacks this year, hurting the share price performance. In October, Merck decided not to seek an approval for its CETP inhibitor, anacetrapib, for cholesterol management as its clinical profile was not strong enough to support the regulatory filings.

Last month, the company also postponed the readout from an important lung cancer study to 2019. This was due to the inclusion of overall survival as a co-primary endpoint in the KEYNOTE-189 phase III study on Keytruda in first-line lung cancer. This raised investors’ concern as the delay in the readout can give competitors a chance to gain strength in the lung cancer market.

In October, Merck also withdrew a regulatory application in Europe, which was looking to get Keytruda approved as a first-line combination therapy for lung cancer.

In September, Merck discontinued the development of two of its HCV combination programs — MK-3682B and MK-3682C — citing the HCV market to be extremely crowded. Also, three combination studies on Keytruda for multiple myeloma were placed on clinical hold following reports of death in Keytruda groups in July. The drug is seen as a key long-term growth driver at Merck and such setbacks do not bode well for the company.

It remains to be seen if the strong performance of the company’s new drugs, particularly Keytruda, its strong vaccines, animal health business and cost-saving efforts can help Merck pick up from here.

Zacks Rank & Key Picks

Merck carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the health care sector are Johnson & Johnson (NYSE:JNJ) , Ligand Pharmaceuticals Inc. (NASDAQ:LGND) and Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Johnson & Johnson’s earnings per share estimates have moved up from $7.18 to $7.28 for 2017 and from $7.71 to $7.85 for 2018 over the last 60 days. The company came up with positive earnings surprises in each of the trailing four quarters with an average beat of 3.21%. Share price of the company has surged 21.9% year to date.

Ligand’s earnings per share estimates have moved up from $3.68 to $3.70 for 2018 over the last 30 days. The company delivered positive earnings surprises in two of the trailing four quarters with an average beat of 8.22%. Share price of the company has surged 29.6% year to date.

Achillion’s loss per share estimates has narrowed from 65 cents to 63 cents for 2017 and from 74 cents to 67 cents for 2018 over the last 30 days. The company came up with positive earnings surprises in two of the trailing four quarters with an average beat of 4.51%.

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