In the world of stocks, big pharmaceutical companies are often viewed as relatively safe. Their business model is reliable, and they make the drugs people need.

If chronic disease and old age were treatable with donuts, then Dunkin’ Brands (Nasdaq: DNKN) would be considered the safest stock in the world. Who wouldn’t follow a doctor’s orders to “take one Boston cream” and call him in the morning?

Unfortunately, we’re not getting any younger, and as we age, we tend to require more medicine. This keeps the revenue and cash flow going for big pharma companies.

This week, let’s look at one of the largest of the big pharma companies: Merck (NYSE: MRK).

The New Jersey-based drug giant has more than 100 approved products on the market. Its roster includes Januvia for the treatment of diabetes, Fosamax for osteoporosis, and a new cancer killer, Keytruda.

Merck also has three dozen clinical trial programs in progress, including treatments for Hodgkin lymphoma, colorectal cancer and Alzheimer’s.

But investors need to know whether it has the resources to pay shareholders this year and whether it will be able to raise future distributions.

While earnings tell one story, free cash flow tells another.

Merck currently pays an attractive 3.4% yield. It’s raised its dividend a total of 38 times since it began paying one in 1970. It cut the dividend once, by half a penny, in 1988. But it boosted it again the very next quarter.

Shareholders have seen raises for the past five years in a row. Between 2004 and 2011, Merck held its dividend steady at $0.38.

So the big question is, what’s ahead?

The Earnings Dilemma

If we calculate Merck’s payout ratio based on earnings, the way most people do, it comes out to a sky-high 115%. This is based on net income of $4.4 billion and total dividend payouts of $5.1 billion.

By this measure, you’d look at Merck and say, “it doesn’t make enough money to pay the dividend.”

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