Last update on 2024-06-27

Merck (MRK.DE) - Dividend Analysis (Final Score: 5/8)

Analyze Merck's (MRK.DE) dividend policy with a final score of 5/8 based on 8 criteria. Understand its performance, stability, and potential for long-term investors.

Short Analysis - Dividend Score: 5

We're running Merck (MRK.DE) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

The analysis evaluated Merck (MRK.DE)'s dividend policy using an 8-criteria system and assigned it a dividend score of 5 out of 8. Here's the breakdown: 1. Dividend Yield: Merck's current dividend yield of 1.5267% exceeds the industry average of 1.09%, indicating strong income generation potential. 2. Annual Growth Rate: Over the past 20 years, the average annual dividend growth rate is 15.97%, much higher than the desired 5%, but with significant volatility. 3. Payout Ratio: The average payout ratio is 71.35%, above the ideal 65%, indicating possible sustainability concerns. 4. Coverage by Earnings: The earnings per share have been inconsistent, leading to fluctuating dividend coverage. 5. Coverage by Cash Flow: The free cash flow coverage ratio has varied, often falling below the safe threshold, reflecting occasional difficulties in comfortably covering dividends with cash flow. 6. Stability: Dividends have not been particularly stable, showing large fluctuations over the years. 7. Long-term Dividend Payments: Merck has paid dividends for more than 25 years, showing long-term commitment to returning value to shareholders. 8. Stock Repurchases: The company has not shown a consistent trend in stock repurchases, indicating other priorities over shareholder returns via buybacks.

Insights for Value Investors Seeking Stable Income

Based on the analysis, Merck (MRK.DE) presents both strengths and weaknesses in its dividend policy. The high dividend yield and long-term dividend payments are positive, but the instability in dividend payouts and high payout ratio suggest caution. Investors looking for reliable, steady income might find the volatility concerning. It's worth further investigation, especially for those who are okay with some risks and are more interested in long-term growth rather than stable, predictable dividends.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Evaluate Merck's latest dividend yield of 1.5267% in comparison to the industry average of 1.09%. Highlight why dividend yield is a relevant metric.

Merck's current dividend yield stands at a robust 1.5267%, which outperforms the industry average of 1.09%. This is a quite significant indicator of Merck's potential as a dividend-generating investment. A higher dividend yield, especially above the industry average, generally signifies a strong income generation capability to shareholders, which could indicate that Merck is in a stable financial position to return profits to its investors. Comparing this to past data, Merck's dividend yield has generally fluctuated but has maintained an appealing level of return throughout the years. For instance, despite peaking exceptionally at 9.2081% in 2009 during economic downturn, the general trend shows Merck offer consistent returns above the average. This trend of consistent performance can be considered favorable for long-term investors looking for reliable income sources. However, it is also crucial to examine the underlying financial health and sustainability of dividend payouts to accurately gauge the investment's attractiveness.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate measures how much the dividend paid by a company has increased on average annually over a specified period. A growth rate higher than 5% is generally considered robust and indicates a company's healthy earnings growth and its confidence in distributing profits to shareholders.

Examining Merck's dividend growth rate for the last 20 years, we find considerable volatility in the numbers. Years like 2009 saw as high as 150% but were offset by significant drops like -66.6667% in 2010. Despite this volatility, the average dividend growth rate over this period is 15.97%, far exceeding the 5% benchmark. This trend seems positive as it suggests that, on average, Merck has been increasing its dividends at a healthy rate, despite occasional reductions. This growth also implies strong financial health and a commitment to sharing profits with shareholders. Consolidating this average across 20 years reflects a robust dividend policy, albeit somewhat unpredictable. Generally, this is a good trend, but investors may want to consider the volatility's impact.

Average annual Payout Ratio lower than 65% in the last 20 years?

The Average Payout Ratio shows the portion of earnings paid out as dividends to shareholders, with an ideal ratio being lower than 65% to ensure sustainability.

Merck (MRK.DE) exhibits an average payout ratio of approximately 71.35% over the last 20 years. This is concerning as it surpasses the ideal threshold of 65%. Examining the data, we observe some exceedingly high payout ratios, particularly in 2003 (176.5225%), 2008 (137.6305%), and 2009 (346.2604%). Such spikes can indicate periods of abnormal earnings or overly generous dividend policies. Even though more recent years see the payout ratio fall closer to the desired level, the historical trend exceeds the recommended safe zone, hinting at potential sustainability issues in consistently generous dividend payouts. Therefore, the trend seen here could be perceived as slightly unfavorable for long-term dividend stability.

Dividends Well Covered by Earnings?

Dividends are well covered by the earnings

Merck's earning per share (EPS) has been inconsistent over the years with noticeable fluctuations. For instance, EPS was 0.5665 in 2003, rose significantly to 8.1524 in 2007, dropped to 0.8664 in 2009, again rose to 7.0266 in 2021. While larger EPS implies higher profitability and thus a greater ability to cover dividends, the fluctuations indicate volatility. When analyzing dividends per share versus EPS specifically, it becomes evident that Merck's dividends are not consistently well-covered by earnings. For instance, in years like 2003, the coverage ratio is up to approximately 1.77, suggesting good coverage. Meanwhile, in years like 2007 and 2017, the ratios drop to approximately 0.11 and 0.40 respectively, indicating poor coverage. This coverage inconsistency could make dividends less reliable for investors depending on their needs for regular income.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow means that the company's free cash flow is sufficient to comfortably cover its dividend payments. This is crucial because it indicates the sustainability of the dividends and the company's ability to return profits to shareholders without jeopardizing its financial stability. A higher coverage ratio is generally seen as a good sign.

By evaluating Merck's free cash flow to its dividend payout amounts from 2003 to 2023, we observe that the dividend coverage ratios vary significantly over the years, with noticeable peaks and troughs. For example, in 2023 the coverage ratio is 0.161, while in 2008 it was 0.435. These values have fluctuated due to various factors such as operational performance, changes in free cash flow, and corporate dividend policies. From 2013 onward, the coverage ratios appear volatile, typically fluctuating around 0.3 and higher, with the occasional drop below 0.1 (e.g., 2020 and 2021). This trend mostly indicates that Merck has found it challenging at times to ensure wide margins of safety in covering its dividends. Particularly notable were the years 2010 (0.067), 2012 (0.051), and 2021 (0.056), where the coverage was very low, indicating tight cash flows in relation to the dividends. However, it's essential to see consistent ratios above 0.2 in more recent years. Companies with ratios consistently below this benchmark may be scrutinized for potentially unsustainable dividend policies unless projected cash flows improve. Therefore, it's requisite to observe Merck's future cash flow management rigorously. While some years show robust coverage like in 2018 (0.627), and even more modest improvements as of late, the overall fluctuating nature of the ratio implies rather an inconsistency in comfortably covering dividends solely with free cash flow. Consequently, the upward trend post-2017 should be cautiously interpreted. Stable and improved free cash flow relative to dividends going forward will be a positive indicator for sustaining Merck's dividend policy.

Stable Dividends Since the Company Began Paying Dividends?

Significant stability in dividend payments is critical as it reflects the company's financial health and reliability. A steady dividend assures investors of constant income and indicates sound corporate governance.

Over the past 20 years, Merck (MRK.DE) has demonstrated quite a variable pattern in its dividend payments. Specifically, the dividend per share dropped by more than 20% in several instances, for example from 3 in 2009 to 1 in 2010 and from 2.6 in 2020 to 1.4 in 2021. Large fluctuations can be a red flag for income-seeking investors who prefer predictability and stability. Therefore, Merck's dividend performance is somewhat concerning. Although the company has increased dividends over the years, these sharp declines might pose risks for investors depending on consistent dividend income. This pattern is generally considered bad for investors seeking stable and predictable dividend payouts over long periods.

Dividends Paid for Over 25 Years?

Extract the importance of evaluating whether Merck (MRK.DE) has paid dividends consistently for over 25 years.

The consistency in paying dividends for over 25 years signifies a company's long-term stability and profitability. If a company like Merck has been able to meet this criterion, it likely demonstrates robust financial health, a reliable business model, and a commitment to returning value to shareholders, which can attract long-term investors.

Reliable Stock Repurchases Over the Past 20 Years?

Criterion: Reliable Stock Repurchases Over the Past 20 Years

Merck (MRK.DE)'s stock repurchase trend over the last 20 years shows that the firm has not consistently repurchased shares. The number of shares outstanding has increased from 384.3 million in 2003 to 434.8 million in recent years, indicating limited buyback activity. Except for 2012 and 2019, there were no significant repurchases, reflecting a potentially conservative capital return policy. This lack of consistent buybacks can imply that the company has prioritized other investment opportunities, retained earnings, or dividend payments over repurchase programs. From an investor standpoint, consistent buybacks are important as they can enhance shareholder value by reducing the number of shares outstanding, thereby increasing earnings per share (EPS). With an average repurchase below 1% annually (around 0.6395%), Merck's inconsistent buybacks do not strongly signal shareholder commitment via this method. This trend is not particularly favorable in terms of using share repurchases to deliver shareholder value.