Income is a big part of investors' returns. Stocks, mutual funds and fixed income ideas in this column are featured because they are relatively solid in their ability to pay dividends or interest. We're giving income investors a resource to start their research for investments that give better yields with lower risk.

January 26, 2011 - Eli Lilly and Co. (LLY-NYSE) develops, manufactures, and sells pharmaceutical products worldwide. It offers neuroscience products to treat schizophrenia, manic episodes, and bipolar maintenance; depression and diabetic peripheral neuropathic pain; attention-deficit hyperactivity disorder in children, adolescents, and adults; depression, bulimia nervosa, and obsessive-compulsive disorders; and bipolar depression and treatment-resistant depression.

In addition, the company offers animal health products, such as cattle feed additives; antibiotics used to treat respiratory diseases and other diseases in cattle, swine, and poultry; leanness and performance enhancers for swine and cattle; protein supplements to improve milk productivity in dairy cows; anticoccidial agents for use in poultry; antibiotics used to control enteric infections in calves and swine; parasiticides for use on cattle and premises; and products that prevents flea infestations on dogs, as well as other pharmaceutical products to treat staphylococcal infections and bacterial infections.

Eli Lilly distributes its products principally through independent wholesale distributors, as well as directly to pharmacies. The company was founded in 1876 and is based in Indianapolis, Indiana.

The dividend is $1.96 a year, has been since 2009. That's 49 cents every three months. It takes 45% of earnings to pay the dividend. Next payment will be on March 9 for holders of the stock on February 11.

Earnings have been higher every year since 2001 when they were $2.76, then dipped to $2.50. But then they started back up: $2.82; $2.88; $3.18; $3.54; $4.02; $4.42. 2010 most likely closed with $4.71 (20 analysts' consensus). Next year, the forecast is for $4.35. Nice trend here. Fourth quarter and annual earnings will be out within a few weeks. Sales have increased every year for 8 years, but this year may break that trend. 2010 should finish with $22.850 billion, but analysts only see $22.8 billion in 2011.

Lilly has suffered from a disappointing late-stage pipeline. Products were delayed. New launches of products were disappointing. Key products are showing a slowdown in sales. It also has many drugs coming off patent in the next 2 years. It will lose exclusivity on several top-selling drugs this year which means a loss of millions in sales. The counter to that is to have research and development develop new drugs or to acquire other companies with drugs already on the market or promising ones in their pipelines. Look for management to focus on both.

Some patents are already gone, ones for best selling drugs Gemzar, Cymbalta and Zyprexa. New drugs won't be developed fast enough to replace these revenues. An acquisition is the only possible way for the company to gain sales rather quickly.

More numbers: Trailing P/E is 7.97 and Forward P/E is 7.99. Price to sales is 1.68. Price to book is 3.09. Book value is $11.23. Operating margin for the last 12 months was 28.82%. Profit margin was 21.10%. Return on equity was an extraordinary 43.15%. Return on assets was 14.42%. Cash is $6.14 billion for $5.56 a share. Total debt is $7.14 billion. Debt to equity is .57. Current ratio is 2.33. Beta is .80. For the last 52 weeks, the stock is down 2.14%. There are 1.11 billion shares outstanding with a Float of 974 million. Institutions have 77.40% of the stock.

If you're focus is income, LLY gives that. But if you're hoping for capital appreciation on top of income, then this most likely isn't your stock. While valuations are low (the P/E ratio used to be consistently in the 20's), there's a reason for it: the future isn't nearly as bright as the past. New drugs need to be discovered and approved or a large acquisition is needed to get investors excited about this stock again.

- Company Web site: www.lilly.com

- Ted Allrich