By cutting eight years off of the above graph, we see that since 2001 Merck & Co., Inc. (NYSE:MRK) has only been able to generate earnings growth of 1.3% per annum. Moreover, not only has the growth been flat, but a significant amount of cyclicality has manifested itself during recent years. Although Merck currently provides a very attractive 3.6% dividend yield, prospective investors should consider Merck’s recent anemic level of growth.
On the other hand, since calendar year 2011 Merck & Co., Inc. (NYSE:MRK) has once again generated some impressive growth averaging 25.6% per annum. But investors should also consider that much of this growth is a result of coming off of a low earnings base that was established in 2010 (see above graph). The point that I am trying to make, is that a company’s growth rate can be very dynamic. If you only relied on earnings growth over the last three years, Merck & Co would look extremely attractive. On the other hand, if you take a longer view of history, your attitude and opinion about the company would change. The morale of this story is statistics in a vacuum can be very misleading.
When looking to the future for Merck, the consensus of 20 analysts reporting to Standard & Poor’s Capital IQ are only forecasting earnings growth over the next five years at 3% per annum. Consequently, expectations of the future are more in alignment with the longer term 12-year history than they are with a more recent two-and-a-half year history. In short, this is not your grandfather’s big pharma anymore. Investors’ attitudes should adjust accordingly.
Amgen, Inc. (NASDAQ:AMGN)
My first featured conservative dividend growth stock in the Health Care sector is Amgen, Inc. (NASDAQ:AMGN). This biotechnology company represents the new breed of pharmaceutical company that has been displacing the incumbent big pharma. The following taken directly from their website provides a brief description of Amgen:
“Amgen strives to serve patients by transforming the promise of science and biotechnology into therapies that have the power to restore health or even save lives. In everything we do, we aim to fulfill our mission to serve patients. And every step of the way, we are guided by the values that define us.”
The following Earnings and Price Correlated 13-year FAST Graph on Amgen, Inc. (NASDAQ:AMGN) illustrates how biotechnology has supplanted big pharma as the pharmaceutical growth stocks of modern times. While the Merck example above produced very anemic growth since 2001, the biotechnology stalwart Amgen was able to grow earnings at 15.5% per annum. Although the company suffered from overvaluation prior to the Great Recession, its stock price has, as we will soon see, come into alignment with earnings justified valuations. Moreover, the company instituted a dividend in 2012, which now turns it into an early stage dividend growth stock.
The following Earnings and Price Correlated FAST Graph since the Great Recession, shows that Amgen, Inc. (NASDAQ:AMGN) produced consistent earnings growth of 11.7% per annum. But most importantly, it shows that Amgen’s stock price has correlated very closely to its operating earnings growth since that time. With a current blended P/E ratio of 15.8, Amgen appears fairly valued today.
The associated performance of Amgen, Inc. (NASDAQ:AMGN) since 12/31/2007 shows that Amgen’s shareholders were rewarded with a rate of return that is closely correlated to the company’s earnings growth rate. This illustrates the power and benefit of investing in strong growth at a reasonable price. Amgen’s recent dividend sweetened the pot even more.
In contrast to the big pharma company Merck, the consensus of 29 analysts reporting to Standard & Poor’s Capital IQ expect Amgen to grow earnings over the next five years at an above-average rate of 9% per annum. Consequently, this further corroborates the notion that biotechnology companies like Amgen represent the new growth segment of the pharmaceutical subsector.
