Shares of pharmaceutical giant Eli Lilly (LLY) rose 3% on Jan. 31, after the company reported better-than-expected financial results for the fourth quarter.

Eli Lilly has had a difficult time over past few years. It has been impacted by falling drug prices and patent expirations.

In response, Eli Lilly increased its investments in research and development over the past several years. With more money being devoted to R&D, Eli Lilly held its dividend steady from 2009-2014.

As a result, Eli Lilly is not a Dividend Achiever, a group of 272 stocks with 10+ years of consecutive dividend increases.

That said, Eli Lilly has a strong history of consistent dividends. It has paid a dividend to shareholders for 130 consecutive years.

And, it returned to dividend growth in 2016.

Eli Lilly has a promising pipeline of new drugs. This should keep the company’s earnings-per-share and dividends growing in the years ahead.

Fourth-Quarter & 2016 Financial Results

Eli Lilly held four main objectives for 2016. These were, to return to revenue growth, expand profit margins, increase the dividend, and continue making progress in new drug development.

The company accomplished all four goals during the year.

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Source: Fourth Quarter Presentation, page 4

Revenue increased 7% in the fourth quarter, to $5.76 billion. This was well above analyst expectations of $5.55 billion.

Revenue from Eli Lilly’s diabetes product Trulicity more than tripled in 2016, to $925 million. This helped offset a 3% sales decline for Humalog, which is Eli Lilly’s top-selling pharmaceutical product.

Separately, revenue from Cialis increased by 7% in 2016. Cialis is the company’s second-best seller, behind Humalog.

The U.S. was a source of strength for Eli Lilly in 2016. Domestic revenue increased 14% for the year, while international revenue declined 1%.

Revenue growth was attributed mostly to volume increases, which helped counteract drug price deflation. Volumes grew 8% in the fourth quarter, led by the company’s new products.

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Source: Fourth Quarter Presentation, page 14

For the year, Eli Lilly’s adjusted earnings-per-share increased 3%. Eli Lilly’s return to growth is a very good sign, as patent losses caused Eli Lilly’s earnings-per-share to decline 48% from 2013-2015.

For example, Eli Lilly lost European patent protection for Cymbalta in 2014. Cymbalta itself represented 4% of the company’s sales outside the U.S. Moreover, Alimta, which made up 7% of international sales, went off patent in Europe in 2015.

The patent cliff challenge will continue this year. In 2017, Eli Lilly faces patent expiration of Cialis, which represents approximately 6% of U.S. revenue and 5% of international revenue.

The good news is that the company has invested sufficiently to restock its pipeline.

Growth Prospects

For 2017, Eli Lilly expects full-year adjusted earnings-per-share to grow to $4.05-$4.15.

At the midpoint of its earnings guidance, the company expects to grow adjusted earnings-per-share by 16% in 2017.

Eli Lilly’s strong earnings growth is the result of aggressive investment in research and development. The company’s R&D expense over the past three years is as follows:

• 2016 R&D expense of $5.2 billion
• 2015 R&D expense of $4.8 billion
• 2014 R&D expense of $4.7 billion

All this R&D spending should pay off—in 2017, Eli Lilly expects revenue from new products to grow to more than $700 million.

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Source: Fourth Quarter Presentation, page 15

For example, over the last year the FDA granted Eli Lilly a new cardiovascular indication for Jardiance. This is one of Eli Lilly’s highest-growth products. Jardiance sales soared from $60 million in 2015, to $202 million in 2016.

And, the FDA approved another new product, Synjardy XR, in 2016. Separately, Eli Lilly received approval from the European Commission, which granted a cardiovascular label update for Jardiance, and gave conditional approval for soft-tissue cancer drug Lartruvo.

Valuation & Expected Total Returns

Eli Lilly stock currently trades for a price-to-earnings ratio of 30. The S&P 500 Index trades for a price-to-earnings ratio of 26 on average.

From this perspective, the stock appears to be slightly overvalued.

That being said, Eli Lilly’s earnings-per-share in 2016 were negatively affected by several one-time costs, including acquisition costs, asset impairments, and restructuring expense.

Excluding these non-recurring factors, Eli Lilly posted earnings-per-share of $3.52. On an adjusted basis, Eli Lilly stock trades for a price-to-earnings ratio of 22.

Using adjusted earnings-per-share, Eli Lilly actually appears to be undervalued.

While the company’s reported results are weighed down by various costs, the underlying business fundamentals remain sound.

Future expected returns will be comprised of earnings-per-share growth and dividends. A reasonable breakdown of future returns could be as follows:

• 4%-6% organic revenue growth
• 1% margin expansion
• 1% share repurchases
• 8% dividend yield

Under this assumption, the stock could generate approximately 8.8%-10.8% per year. And, this does not include capital gain potential from expansion of the price-to-earnings ratio.

Dividend Analysis

Eli Lilly has paid a dividend for more than a century, but its dividend growth streak was thrown off track after 2009.

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Source: Investor Relations

The combination of the effects of the Great Recession, plus a stiff patent cliff, required the company to halt its dividend growth. Instead of raising its dividend, management committed the company’s excess cash flow toward R&D, to boost its pharmaceutical pipeline.

These investments were right on the money, as the company now has a robust product portfolio. This has resulted in significant revenue and earnings-per-share growth over the past few years, which in turn allowed Eli Lilly to return to dividend growth.

The company recently raised its dividend by 2%, to $2.08 per share on an annual basis.

Eli Lilly’s forward annualized dividend payout represents 59% of its 2016 adjusted earnings-per-share. This leaves room for continued dividend growth in the mid-single digit range.

Final Thoughts

Eli Lilly has a solid 2.7% dividend yield. And, now that the company’s growth investments are bearing fruit, it has returned to dividend growth.

While last year’s dividend increase was a fairly tiny bump, investors can expect dividend growth rates to increase in 2017 and beyond.

Eli Lilly’s future dividend growth should improve from its recent trend, as its earnings growth rate accelerates. Plus, the company maintains a modest payout ratio.

The healthcare sector is a haven for income investors right now. With a modest valuation and above-average dividend yield, Eli Lilly remains a strong healthcare stock.