Stock Analysis: Eli Lilly and Co. (LLY)

This article originally appeared on The DIV-Net July 7, 2008.

Linked here is a PDF copy of my analysis of Eli Lilly and Co. (LLY) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Eli Lilly and Company discovers, develops, manufactures and sells prescription drugs that offers a wide range of treatments for neurological disorders, diabetes, cancer, and other conditions. The company also sells animal health products.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
   
2. 20-Year DCF Price
   
3. Avg. P/E Price
   
4. Graham Number

LLY is trading at a discount to 1.) and 3.) above. If I exclude the high and low valuation, and average the remaining two valuations, LLY is trading at a 9.3% premium. A Star is deducted since LLY is trading at a premium in excess of 5%.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description:

1. Rolling 4-yr Div. > 15%
   
2. Dividend Growth Rate
   
3. Years of Div. Growth
   
4. 1-Yr. > 5-Yr Growth
   
5. Payout 15% of avg.

LLY earned two Stars in this section for 3.) and 4.) above. It has paid a cash dividend to shareholders every year since 1885 and has increased its quarterly cash dividend payments for 40 consecutive years. The 1-Yr. > 5-Yr Growth metric indicates that dividend growth has been accelerating.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
   
2. Years to >MMA.

LLY earned one Star in this section for 1.) above, and was very close to earning a Star for 2.) above. A company earns a Star for Years to >MMA if it less than 5 years and LLY is at 5 years.

Other: LLY is a member of the S&P 500, is an Achiever and an Aristocrat. Drug companies are facing challenges to their branded patents, drug development and regulatory issues. However, LLY's drug portfolio has limited near-term patent expiration exposure and it has a healthy pipeline in place.

Conclusion: LLY lost a Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Stars in the Dividend Income vs. MMA section for a net total of 2 Star. This quantitatively rates LLY as a 2 Star-Weak stock.

LLY is a good example of why you don't stop with a mechanical quantitative analysis. The NPV MMA Diff. is one of the main metrics I look at and at $4,355 it exceeds the $3,000 I look for in a company that is both an Achiever and an Aristocrat. In the case of LLY, the rating is purely a valuation issue and even there it is extraordinarily close. If LLY had closed at $45.10, instead of the $46.98 used in this valuation, this $1.88 (4%) decline would have made LLY a 4-Star Buy.

Using my D4L-PreScreen.xls model, I determined the dividend growth rate could drop more than a full point to 5.7% and still generate the $3,000 NPV of MMA Differential that I look for from a company that is both an Achiever and an Aristocrat. I have added LLY to my watch list.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I do not own shares of LLY (0.0% of my Income Portfolio).

What are your thoughts on LLY?


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