Stock Analysis: Eli Lilly and Co (LLY)

This article originally appeared on The DIV-Net May 18, 2009.

Linked here is a detailed quantitative analysis of Eli Lilly and Co (LLY). 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 valuations and average the remaining two, LLY is trading at a slight discount. LLY earned a Star in this section since it is trading at a fair value.

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 one Star in this section for 3.) above. LLY has paid a cash dividend to shareholders every year since 1885 and has increased its dividend payments for 42 consecutive years.

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 both of the available Stars in this section. The NPV MMA Diff. of the $10,982 is in excess of the $2,500 minimum I look for in a stock that has increased dividends as long as LLY has. LLY's current yield of 5.74% exceeds the 3.64% estimated 20-year average MMA rate.

Other: LLY is a member of the S&P 500, a Dividend Aristocrat and a member of the Broad Dividend Achievers™ Index. Like all pharmaceutical companies, LLY faces generic challenges to the its branded patents. The company must continuously development new drugs and face regulatory risks. LLY has a robust pipeline and a diverse drug portfolio with limited near-term patent expirations. Risks include competitive pressures and failure of new drugs to perform.

Conclusion: LLY earned one Star in the Fair Value section, earned one Star in the Dividend Analytical Data section and earned two Stars in the Dividend Income vs. MMA section for a net total of four Stars. This quantitatively ranks LLY as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price could increase to $52.55 before LLY's NPV MMA Differential fell to the $3,000 that I like to see for a stock with 42 consecutive years of dividend increases. At that price the stock would yield 3.73%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the needed $3,000 NPV MMA Differential, the calculated rate is -2.2%. This dividend growth rate is negative and well below the below the 4.3% used in this analysis, thus providing a margin of safety. LLY has a risk rating of 2.00 which classifies it as a medium risk stock.

Looking at the attached PDF, the first thing the grabs your attention are the graphs showing LLY's 2008 earnings and cash flow. The company realized record cash flows while earnings plummeted. This is usually a result of the company recording a non-cash accounting charge. In LLY's case, the company completed its acquisition of ImClone Systems Inc., resulting in a significant charge of $4.69 billion ($4.46/share) for acquired in-process research and development (IPR&D) and reached resolution on government investigations related to its past U.S. marketing and promotional practices for Zyprexa®, resulting in an additional charge of $1.48 billion. I recently added to my position and will consider future additions below my $34.70 buy price. For additional information, including the stock's dividend history, please refer to its data page.

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 was long in LLY (3.8% of my Income Portfolio).

What are your thoughts on LLY?

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