A Good One For Mom

Brian Shannon April 2, 2012

Let me warn you, if you are looking for a high octane stock which you can trade for short term gains, this story isn’t going to appeal to  you.  But if you are interested in a large cap stock with low volatility (beta of just 0.55, or about half that of the S&P 500), the chance for upside gains and pays a hefty dividend, read on!

Founded in 1876, Eli Lilly & Co ($LLY) is a massive pharmaceutical company whose sales topped $24 billion last year.  For a company that has been around so long it seems strange to me that it was just added to the S&P 100 index this month.

Lilly is not a growth play, not yet.  In fact, revenues are expected to decline this year and in 2013 before growth is expected to resume in 2014.  As with a lot of established drug companies, the biggest challenge that Lilly faces is some of their drugs coming off patent, which means competitors will offer generic versions of the same formula for much less.  That will hurt sales and profits.

That is the bad news, the good news is that this information is already know by the market and the stock price seems to have absorbed the information.  Remember, stocks trade based on future expectations, not on what has already happened.

The company currently has 12 drugs in Phase III testing with the FDA and it is from these new medicines that sales and profits are expected to grow again in 2014.  You may be thinking 2014, that’s 2 years away!  That is certainly much longer of a time horizon than I have the patience for, but my mother is always looking for conservative ways to grow her money and the nice thing about LLY is that buying at current prices will pay the patient investor a dividend of 1.96/share, that is an annual yield of 4.9%.  By the way, management has stated that they have no intention of cutting the dividend.

I have always thought it is foolish to buy a stock just for the dividend, I have seen many high dividend paying stocks drop 20, 30, 50% or more while investors tell themselves everything is okay because they locked in a yield of xx% when they purchased the stock.  Never buy a stock because of a dividend if the stock is in a downtrend.  You have to preserve your capital at a minimum, but even better if you have a stock entering a new uptrend you may get some decent upside in the share price as well.  That is what LLY appears to offer.  If you are familiar with my work you know what is coming next, the chart!

The weekly chart below shows how 2008 and 2009 were very difficult years for shareholders of LLY, if you bought above 45 or so CONTINUE READING ON SFO