Eli Lilly and Co.’s Valuation Cheat Sheet for 4Q15

Valuation multiples

We believe that forward PE (price-to-earnings) and EV-to-EBITDA (enterprise value to earnings before interest, tax, depreciation, and amortization) multiples are the two best valuation multiples to use when valuing Eli Lilly and Co. (LLY) and other large pharmaceutical companies, given the relatively stable and visible nature of their earnings.

PE multiples are widely available and represent what one share can buy for an equity investor. EV-to-EBITDA multiples, on the other hand, are capital structure–neutral.

Eli Lilly and Co.’s Valuation Cheat Sheet for 4Q15

Forward PE

On January 29, 2016, Eli Lilly (LLY) was trading at a forward PE multiple of ~22.1x. Based on the last five years’ multiple ranges, Eli Lilly’s current valuation is neither high nor low, and its PE multiple has ranged from ~7.6x–26.5x.

Eli Lilly and Co.’s valuation multiple has followed the industry’s overall trend in the last five years. Whether the healthcare sector’s forward PE multiple rises or falls, Eli Lilly will be affected. The industry currently trades at a forward PE multiple of ~17.1x. Its competitors Pfizer Inc. (PFE), Merck and Co. (MRK), and Johnson and Johnson (JNJ) have forward PE multiples of 12.7x, 13.6x, and 16.0x, respectively.

Dividend yield

Given the company’s stable state, the dividend yield for Eli Lilly was 2.37% for 2015, while it is estimated at 2.58% for 2016 and 2.64% for 2017. The dividend payout ratio for 2015 was 88.5% while it is estimated for 2016 and 2017 at 57.7% and 52.3%, respectively. The company’s mature state has helped it pay regular dividends, making it an option for both growth and income investors.

Forward EV-to-EBITDA

On a capital structure–neutral and excess cash-adjusted basis, Eli Lilly currently trades at ~15.4x, which is much higher than the industry’s average of ~12.5x. Its competitors Pfizer Inc. (PFE), Merck and Co. (MRK), and Bristol-Myers Squibb Co. (BMY) have forward EV-to-EBITDA multiples of 8.9x, 9.9x, and 26.2x, respectively.

Investors can consider ETFs like the iShares Russell 1000 Growth ETF (IWF) which holds ~0.8% of its total assets in Lilly, or the iShares Core S&P 500 ETF (IVV), which holds ~0.5% of its total assets in Eli Lilly.