Is Novartis' Dividend at Risk?

Some investors love dividends. There are even mutual funds and ETFs that only hold shares of companies that have paid dividends the longest.

Although a history of increasing dividends is a good indication that the practice will continue, it is no guarantee. General Electric (GE 1.01%) has paid a dividend for 120 consecutive years but was forced to cut it during the Great Recession, as well as twice in 2018. Investors who had counted on the dividend couldn't get very far with the $0.01 per share after the 2018 cut.

Novartis (NVS 0.59%) investors are loving the 3.6%-yielding dividend from the well-diversified drugmaker right now, but are they at risk of having the rug pulled out from under them? With a track record of 23 consecutive years of increasing its dividend, the company can make its case as one of the more reliable high yielders around. Let's look at a few numbers that may indicate if management will have trouble keeping up that record in the future.

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A well-diversified product portfolio and pipeline

Novartis is the epitome of a diversified healthcare business: a pharmaceutical company with drugs targeting many of the most prevalent diseases. Its five most prominent branded products each generate between $1.7 billion and $3.6 billion in sales across immunology, dermatology, neuroscience, ophthalmology, oncology, cardiovascular medicine, and other fields. The company is also invested in cutting-edge medicine in cell and gene therapies, including the gene-editing CRISPR-based technology.

Source: Novartis. Table by author.

In August, a judge upheld the patent for Novartis' multiple sclerosis drug Gilenya, protecting it from generic competition through 2027. In addition to defending its blockbuster drugs against lawsuits from generics, the company continues to innovate.

Aimovig, a once-a-month injection to prevent migraine headaches, was approved in 2018. Although the approval was granted to Amgen (AMGN -1.38%), a 2015 deal between the pair gave Novartis co-marketing rights in the U.S. and commercial rights in all other countries except Japan. Novartis is now battling Amgen in court in order to reaffirm "its contractual right to share in the product’s success and recoup its significant investments.” Novartis estimated to have spent over $870 million on the drug's development since 2015.

Another new drug called Kisqali, which is a treatment for breast cancer, was shown to improve survival duration in certain patients by nearly a year versus an alternative therapy. These new drugs are welcome to Novartis, which has streamlined its focus, selling off its animal health, vaccine, and consumer health businesses in the past five years.

Do earnings support its dividend?

A history of dividend increases, billion-dollar drugs, and a strong pipeline sound like the components of dividend royalty. But we need to look more closely at Novartis' financials to see whether management can keep up the string of dividend growth, or whether payouts have gotten ahead of profits.

The main components that determine whether a company's historic dividend performance will match its future are how well profits can cover the dividend and whether those profits are growing fast enough to keep up. That last part, growing profits, can be eked out by cutting expenses in the short term, but requires sales to grow over the long term to cover a growing dividend. How does Novartis measure up?

Sales have been nearly flat over the past 10 years, going from $51.6 billion in 2010 to $49.6 billion over the last 12 months. That's a yellow flag, but it isn't surprising. The company has sold off many of its businesses over the past five years. Most companies that sell off less-profitable or slower-growing business units do so to create a more profitable, faster growing company. However, Novartis' net income has trailed its sales over the past decade, going from $9.8 billion to $7.1 billion for the past 12 months -- yellow flag No. 2. Finally, with the dividend having grown from $1.95 to $3.09 during that timeframe, the portion of the company's profits that now go to dividends has jumped to 99%.

NVS Payout Ratio data by YCharts

Can the payouts keep up?

Novartis is a diversified pharmaceutical company with very profitable drugs across many diseases. Management has streamlined the company in the past decade, but it doesn't appear that the strategy has produced higher profitability or faster growth -- at least, not yet. The company has a respectable dividend and has raised it consistently, but it looks like the math working against Novartis in the near future.

While the dividend does not appear to be at risk, management will need to find significant paths to grow sales, or the dividend raises may be minuscule for the foreseeable future. For investors looking for a high-yielding healthcare dividend stock, Novartis looks like a safe bet, but don't expect the annual raise that the company has delivered in the past.