High inflation and rising interest rates often adversely impact the performance of growth stocks. Investors can look no further than the tech-oriented Nasdaq Composite's 26% year-to-date drop as evidence of this claim.
On the other hand, income stocks have performed very well so far this year. Shares of Swiss pharma stock Novartis (NVS 0.46%) have remained flat year to date. But should yield-focused investors buy the stock? Let's take a look at Novartis' fundamentals and valuation to find out.
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Another quarter of decent earnings growth
On April 26, Novartis reported solid results for its first quarter ended March 31. The company generated $12.5 billion in net sales, which works out to a 1% growth rate over the year-ago period. What contributed to the company's growth for the quarter?
Seven of Novartis' top 10 drugs by net sales produced growth in the first quarter. This was led by a 10% jump to to $1.2 billion for Novartis' top-selling Cosentyx (which treats various autoimmune conditions like psoriatic arthritis). Meanwhile, the drugmaker's heart failure drug Entresto posted a 39% year-over-year growth in sales to $1.1 billion. These were the two major contributors.
The impressive net sales growth in these drugs more than offset the respective mid-single-digit to low-double-digit decline in net sales for Luctentis (which treats various eye conditions), Gilenya (for multiple sclerosis), and Tasigna (for chronic myeloid leukemia).
Novartis recorded $1.46 in non-GAAP (core) earnings per share (EPS) in the first quarter, which is equivalent to a 5.8% year-over-year growth rate. So how did the company deliver respectable earnings growth?
NYSE: NVS
Key Data Points
Aside from Novartis' higher net sales base, two factors explain the company's earnings growth in the first quarter. Due to improved operating efficiency, Novartis' non-GAAP net margin expanded by 100 basis points over the year-ago period to 25.9% for the quarter. And the company's outstanding share count declined as a result of its $2.7 billion in share buybacks that were executed during the first quarter.
Since Novartis has 156 projects in different stages of clinical trials, analysts are expecting a similar 5% annual earnings growth rate for the next five years.
The dividend looks safe
Novartis' 3.8% dividend yield appears to be viable for the long run. And its earnings growth outlook isn't the only reason that I hold this belief. It's because Novartis' dividend payout ratio will be around 53% in 2022.
This leaves the company with the funds to focus on business growth and share repurchases to drive its core EPS upward over time. And it also provides Novartis a margin of safety to maintain its payout if there is a temporary decline in earnings for whatever reason.
A discounted healthcare stock
Based on its fundamentals, Novartis is a blue-chip dividend stock. And best of all, investors can purchase the stock at a favorable valuation. Novartis shares are trading at a forward price-to-earnings ratio of 14, which is slightly less than the average multiple of 16 for the S&P 500's healthcare sector.
And if that weren't enough proof that Novartis is sensibly valued, the stock's trailing 12-month dividend yield of 3.8% is the same as its 10-year median. This makes Novartis a solid stock for income investors to think about buying at its current $88 share price.
