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Should You Buy Big Pharma Company Eli Lilly?

Over the last couple months, I’ve shown you stocks to avoid…

Stocks to consider buying…

And some of the best stocks related to the coming Internet of Things…  Which you can find linked further below.

All these recommendations are to help you either avoid pain and terrible stocks.  Or to help you find potentially great stocks to invest in during this pandemic.

If you do both well, it helps you earn higher than average investment returns and build wealth.

Because the fewer investment losses you have the more capital you keep. And the more capital you keep the faster you compound your money.

With that in mind, today I want to answer – Should You Buy Big Pharma Company Eli Lilly?

Eli Lilly (LLY) is a world leading pharmaceutical company with a focus on neuroscience, endocrinology, oncology, and immunology.

Some of its key products are…

  • Alimta
  • Verzenio
  • Jardiance
  • Trulicity
  • Humalog
  • Humulin
  • Taltz
  • And Olumiant

It’s based in Indianapolis Indiana.  It has a $193.7 billion market cap. And it pays a 1.7% dividend which is reason #1 to consider buying its stock.

Eli Lilly’s 1.7% Dividend

In the last decade, Lilly’s paid out a total of $20.75 per share in dividends.

At today’s share count of 913 million, that’s equal to $18.94 billion paid out to shareholders in that time.

Plus, in the last decade it grew its dividend from $1.96 per share in 2010 to $2.87 per share today.

This is an increase of 46.4% in the last decade.

These regular payments help you earn more money for your retirement.  And they’ll help you in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns large profits.  Which is reason #2 to consider buying Eli Lilly stock.

Eli Lilly Earns Large Profits

Over the last decade it earned an average operating income margin of 22.5% per year.  

I look for anything above 10% consistently. 

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 16.5% per year on average.  

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and valuable.

Eli Lilly surpasses both ultra-important metrics… Which not only means it’s a world class business operation.  But it also adds an enormous margin of safety to potentially buying its stock.

Another benefit… These profits also allow it to have decent debt levels.

Eli Lilly Has Decent Debt Levels

As of this writing it has $3.63 billion in cash compared to $16.92 billion in debt.

As a percentage of its balance sheet, total liabilities make up 89%.

Debt only makes up 8.7% of its market cap.

And its debt-to-equity ratio is 3.38.

These split.

The cash compared to debt and debt to market cap are well below the thresholds I look for.  But the liabilities as a percentage of balance sheet and debt to equity ratios are well above what I look for.

This makes Eli Lilly a bit riskier than I’d like.  But so far, it’s not a huge deal because of its huge profit and cash flow production.

But what about its valuation?  Is it cheap enough to buy? 

Eli Lilly IS NOT Cheap

With the markets at or near all-time highs you’d expect a good stock like Eli Lilly to be selling at an enormous valuation.

Unfortunately, it is.

Its P/E is 31.2.

Its P/CF is 22.

Its forward P/E is 19.6.

And its EV/EBIT is 30.1.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These show that Lilly is massively overvalued right now.

And this means owning its stock gives you no margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning it going forward.

Because Eli Lilly is overvalued, it makes owning its stock enormously risky.  And for this reason, I recommend you avoid buying it.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy, consider Eli Lilly… But only when its cheaper.

Use the following links to some of our recent articles to learn other ways to protect yourself and your investments in these uncertain times.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above

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