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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Merck

November 11th 2011 Merck
NYSE Symbol: MRK
Industry: Drugs
Price as of 11/11: $34.97

It was a nice little week for the major averages excluding Wednesday. Wednesday's 400 point drop reminds us that the European debt crisis remains the lead story in this topsy turvy world of investing even though the economic data in the US continues to slowly improve. The earnings season is pretty much over and the numbers are much better than expected. In fact, the trailing four quarter earnings for the S&P 500 of $96 a share are now record numbers however the averages remain well below peak 2007 highs. The volatility this year has been unprecedented. Nearly 50% of the trading days this year have generated 1% moves either up or down in the major averages. Great for traders, but uneasy for long term investors who prefer a more smooth upward trend. For investors looking to avoid volatility there are a plethora of compelling income ideas in the markets. The defensive sectors like healthcare, utilities, and consumer staples continue to shine. This week we'll feature a blue chip drug stock that raised its' dividend. The stock of the week is Merck. Like most stocks Merck got hit in August, but rebounded smartly, rallying 17% from the August lows. The stock is typically less volatile with a beta of only 0.62. Even with the run up, the stock remains compelling trading for 9 times earnings. The recent 10% hike in the dividend only makes the stock more compelling for income investors.

The maker of diabetes drug Januvia and Singulair for asthma and allergies said third-quarter net income climbed to $1.69 billion, or 55 cents per share, up from $342 million, or 11 cents per share, a year earlier. Excluding the acquisition of Schering-Plough, adjusted income rose to 94 cents per share, 3 cents per share higher than expected by analysts. Revenue came in at $12.02 billion up 8 percent from a year ago, largely due to a 5 percent boost from favorable currency exchange rates, but down from $12.15 billion in the second quarter. Merck boosted sales in emerging markets such as China and India to $1.8 billion in the quarter. Like other drug makers, Merck continues to suffer from U.S. and European government health programs reining in spending, generic competition to former blockbusters and other problems. To combat this, Merck has been reigning in costs. The company modestly cut Research and Development while also announcing job cuts ahead of patent expirations. The job cuts will amount to 12,000 to 13,000 by 2015. This comes on top of the 11,500 jobs lost last year. The recent cost cuts have allowed Merck to raise estimates to $3.72 a share and $3.76 a share, compared to previous guidance of $3.68 a share and $3.76 a share. As mentioned earlier, the money saved from cost cuts will also go to boost their dividend.

Even with the recent rally, Merck's stock remains compelling. Currently, the stock trades for 9 times earnings, 2 times sales, 1.94 times book value of $18 a share. Premarket on Thursday, Merck's yield of 4.4% ranked it 42nd within the S&P 500 based on highest dividend yielding stocks. Thanks to a 10% dividend hike Thursday morning, the yield jumped to 4.9% premarket moving it to the 24th spot in the S&P 500. Chances are the rally in Merck is not over. Investors looking for a little less volatility with a great dividend yield with modest stock growth should take a look at Merck.