Though stocks are not necessarily a substitute for cash, government or corporate bonds, the payout on the S&P 500 (1.38%) is generous versus the income provided by fixed income, suggests Jason Clark, contributing editor at The Prudent Speculator.
Incredibly, equities yield almost as much as the Barclays Aggregate Bond Index and 46 times the yield of a "generous" money market fund.
With the Fed seemingly on hold for the foreseeable future in regard to potential interest rate hikes — and our expectations that, while they may tick up further, rates will remain very low by historical standards — we continue to believe that equities in general are attractive from an income perspective.
Amgen (AMGN) plunged after the biotech giant reported underwhelming Q1 financial results. The $3.70 per share earned in the quarter was 8% below the consensus analyst estimate and 11% below the 2020 figure.
Total product sales decreased 5% for the period versus the same quarter a year ago as a 7% decline in net selling prices was offset by 4% unit volume growth.
Representing 20% of total sales, the firm’s leading drug Enbrel continues to have a major impact on the top line. Enbrel sales decreased by 20% year-over-year for the first quarter, driven by unfavorable changes in estimated sales deductions, volume declines and lower net selling price.
That outlook anticipates the negative pricing pressures in recent months to alleviate in the back half of the year, with $25.8 billion to $26.6 billion of sales and EPS in the range of $16.00 to $17.00 for the full year.
Management also upped the top end of its spending range for share repurchases by $1 billion to between $3 billion and $5 billion.
Competition from biosimilars against Amgen’s portfolio is expected to intensify in the coming years. Nevertheless, the firm’s sound balance sheet and significant cash flow generation allow it to invest in defending its position through R&D or through acquisitions.
AMGN also continues to prioritize capital returns: In recent months, the board increased the dividend by 10% in Q1 to $1.76 and management repurchased 3.7 million shares in the first quarter at an average price of close to $234 per share.
Given recent selling pressure, shares are within a stone’s throw of their price a year ago and are changing hands at a very reasonable forward P/E multiple of 14. With the dividend yield now at 2.9% and the company boasting a strong pipeline of new therapeutics, our Target Price for AMGN now resides at $289.
Merck & Co. (MRK) dropped after the pharmaceutical giant announced that it earned $1.40 per share in Q1, nearly 14% below the consensus analyst estimate. Revenue for the quarter declined marginally to $12.1 billion as a high bar in Q1 of 2020 and COVID-19 presented headwinds, even as Keytruda (32% of sales) grew 16%.
Current CEO Ken C. Frazier reminded that he is set to retire on June 30 and will be succeeded by Robert Davis, who is currently the firm’s President.
The spin-off of Merck’s women’s health, trusted legacy brands and biosimilars businesses (to be called Organon) is expected to take place on June 2, with trading in the new stock commencing on June 3.
For the combined entity, management anticipates revenue of $51.8 billion to $53.8 billion, representing growth of 8% to 12% versus 2020, and adjusted EPS to be between $6.48 to $6.68, reflecting growth of 12% to 15%.
We think that the continuing successful data on Keytruda in several indications offers Merck significant growth potential and reinforces the strong pricing power for the drug. MRK also has a wide lineup of high-margin drugs outside of Keytruda, as well as a pipeline of new drugs which should ensure strong returns on invested capital over the long term.
MRK boasts a history of returning cash to shareholders, a diversified revenue stream and solid free-cash-flow generation. The current dividend yield is 3.5%. Our Target Price for the combined MRK is now $107.
