Eli Lilly (LLY) is a blue chip stock that has paid a consistent dividend since the early 1970s.
The company’s total dividends paid have increased from 4.55 cents per share in 1972 to a projected $2.04 per share in fiscal year 2016.
However, the company’s dividend growth rate has materially slowed, and the dividend payout ratio is now over 80%.
Should investors be concerned that Eli Lilly could be poised for years of flat dividends or possibly even a cut to the dividend?
Let’s take a look at the business.
Business Analysis
Eli Lilly is a global pharmaceutical company with an operating history that dates back to the late 1800s. In 2015, they generated sales of nearly $20 billion, which is down from the recent peak of $24.3 billion in 2011.
In general, the pharmaceutical industry can be a pretty good space to invest in for dividend investors seeking a stable dividend income over time.
Dividend investors do not have to worry about economic cycles or cyclical end markets leading to an unanticipated dividend cut when investing in this recession-resistant industry.
Besides analyzing all the usual important financial ratios, dividend investors instead need to pay attention to the quality of the product portfolio and pipeline of new products along with any significant legal issues the company could have outstanding.
Eli Lilly operates the business through two business segments – human pharmaceutical products (84% of sales) and animal health products (16%).
The Human Pharmaceutical Products business produces therapeutics targeting areas including endocrine, neuroscience, oncology, and cardiovascular. Their key drugs targeting these markets are Humalog (diabetes), Alimta (cancer), Forteo (osteoporosis), Cialis (cardiovascular), and Cymbalta (depression). They have 6 different billion-dollar revenue drugs, and their top ten drugs add up to nearly 70% of sales.
The Animal Health Products business produces drugs for companion animals as well as farm animals. In January 2015, they completed the acquisition of Novartis Animal Health for $5.3 billion dollars to improve their competitive position within the market, particularly within companion animal and swine markets.
Like many other large pharmaceutical companies, Eli Lilly recently transitioned through a difficult time with a patent expiration in many key drugs. They lost patent protection on Zyprexa (2010 revenue of $5 billion), Cymbalta (2012 revenue of $5 billion), and Humalog (2012 revenue $2.4 billion).
Source: Simply Safe Dividends
However, they are not completely out of the woods yet. Over the next few years they face patent expiration in key markets for large products including Alimta (13% of sales), Cialis (11%), Forteo (7%), Cymbalta (4%), Zyprexa (4%), Strattera (3%), and Effient (2%).
Thankfully, Eli Lilly invests around 20% of sales in research and development, above peers who average in the mid-teens (see our analysis on Johnson & Johnson).
These investments have resulted in a rather robust pipeline of new products in their late stage pipeline and even a few recent introductions to the market.
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