Healthy yields: People and pets

We continue to believe that there is solid reasoning in support of stocks of companies that reward shareholders with generous yields.

Incredibly, the yield on the benchmark government bond is now below that of the broad-based S&P 500 equity market benchmark. It has been more than five decades since that last occurred. Here's a look at 2 stocks on our buy list that offer 4%+ yield -- Merck & Co. (MRK) and PetMed Express (PETS).

Merck is a global pharmaceutical company focused on discovering, developing and marketing drugs for respiratory, immunology, cardiovascular, diabetes, infectious diseases, oncology and other indications.

The company is also a global leader in vaccines and is further diversified with animal health and consumer products divisions.

Investors remain concerned about the upcoming loss of patent protection for the blockbuster drug Singulair, but we note that some of Merck�s new products, like Januvia for diabetes, Isentress for HIV, and the Gardasil vaccine against human papillomavirus represent new blockbusters and should alleviate some of the firm�s upcoming top-line pressures.
Management recently reaffirmed its full-year 2012 per share earnings target of $3.75-$3.85.

We like that Merck has solid product pipeline potential and is proactively seeking opportunities to cut costs, while expecting to achieve some $4 billion in annual cost-saving synergies by 2015 from its Schering-Plough acquisition.

We believe Merck offers a good mix of low valuation, strong free cash flow generation and track record of returning cash to shareholders. MRK currently yields 4.5%.

PetMed Express is a nationwide pet pharmacy that delivers prescription and non-prescription pet medications for dogs, cats and horses directly to the consumer.

The company also sells pet accessories, pet food, and health and nutritional supplements. PetMed�s products are marketed primarily through its Web site and over the telephone.

We were pleased to see PETS recently report a solid fiscal Q4 that included strong new and reorder growth and the addition of 162,000 new customers.

However, investors ignored the relatively positive results and sent shares sharply lower due to concerns over the advertising spend and increased cost of new customer acquisitions.

We believe that PetMed has ample room for growth in the almost $50 billion pet market, and we are encouraged by the improving trends as we head into the seasonally strong part of the year.

Management continues to actively repurchase shares and during fiscal 2012, increased the dividend by 20%, with the shares now yielding 5.3%. PETS has a strong balance sheet that boasts no long-term debt and $2.80 per share of cash and equivalents.



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