Merck (MRK) is a Good Dividend Play

I like Merck for two reasons:

1. It looks to be undervalued
2. It pays a handsome dividend (4.2% yield)

Merck is a powerhouse of a company in terms of size and profitability.  It is worth over 55 billion dollars in book value on its balance sheets, and the profit margin and return on equity are over 17% and 20%, respectively.

While the stock market (S&P 500) has had an aggregate increase in value of 12.83% over the past 52 weeks, Merck has declined in value by 2.46%.  I believe this is a sign of undervaluation because of the financial strength of Merck and because of its dividend.  Merck pays a 4.2% dividend with only a 50% payout ratio.  The payout ratio represents the percent of earnings that a company pays out to shareholders in the form of dividends.  Therefore, Merck is paying out 50% of its earnings to shareholders.  Because this number is not very high (I consider very high to be above 70%) there stands a very good chance that Merck will continue to pay this dividend.