Growing Tailwinds Make Eli Lilly (NYSE:LLY) A Buy

A Speculation For Dividend-Growth Investors

Elly Lilly (LLY) announced some news this morning that set it up as another great speculation on COVID-19 treatments. Upon a deeper look, I have discovered a number of tailwinds that set this speculation up as a great play for dividend-growth investors. Today’s news? Eli Lilly began testing an experimental COVID-19 treatment. The treatment is derived from the blood of a COVID-19 survivor and is the first of its kind to be tested. The news is especially encouraging for Eli Lilly investors because it comes a full-month ahead of schedule. Rival Regeneron (REGN) is expected to begin a similar study on COVID later this month.

More To This Stock Than Speculation

The COVID-19 news is great for Eli Lilly but not the reason this stock is a great play for dividend growth investors. Along with the news, there are a number of tailwinds that promise to boost an already stellar outlook. Among these are recent FDA approvals for new or expanded use of newer drugs.

• Tauvid - The FDA approved Tauvid for intravenous injection, it is a radioactive diagnostic agent for Alzheimer’s patients used to map brain activity. This is a major leap for scientist who had, until now, been forced to study the same structures in cadaver.
• Cyramza - The FAD approved Cyramza as a front-line treatment for lung cancer. This brings the total number of indications for this drug up to six including liver, colon, and stomach cancers.
• Taltz - The FDA approved the expanded use of Taltz. Taltz is a treatment for arthritis sufferers, this approval brings the number of accepted uses to six.

Turning to the outlook, the consensus expectation is for steady revenue growth in the range of 7% over the next two years. Beyond that, revenue growth is expected to hold steady in the mid-single-digit range for at least the next ten years. The bottom-line consensus is more robust. The analysts are projecting EPS growth in the range of 14% this year and next. The longer-term outlook is EPS growth to hold steady in the high-single to the low-double-digit range.

A Highly-Valued Stock, But Value Is Where You Find It

If you compare Eli Lilly to its competitors you will find it to be a highly-valued stock. Where Pfizer (PFE), Merck (MRK), and Amgen (AMGN) are trading 9X to 15X their forward earnings Eli Lilly is closer to 23X earnings. The difference, however, is in the value, what it is you get for the money. In the case of Eli Lilly, you get superior profitability and a more-consistent outlook for growth to support the dividend.

The dividend isn’t exciting but it is at least in-line with the broad market average. At today’s prices, the yield is just over 2.0% with no expectation for distribution cuts or suspensions. In fact, based on the payout ratios (drops from 49% to 38%, 2019 to 2021 projected), the outlook for growth and company history of increases another increase is on the way. Looking at the company history, that increase will likely come in the Q1 reporting season winter 2021. 

The Technical Picture: Break-Out Confirmed, New Highs In Sight

The technical picture here just about speaks for itself. This stock was trending higher, the pandemic sparked a correction, the correction tested support, support confirmed and a new high was set. Since then, price action has retreated to the previous resistance where support is once again showing its face. Through it all, Lilly outperformed all of its peers, stocks that are still trading below their pre-pandemic levels.

The indicators are still mixed but they are consistent with support at this level and set up to fire bullish trend-following signals as price action rises. Investors may want to make a small purchase now with the intent of adding to it when price action crosses the $160 and $170 levels.