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 -0.55%) 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?
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.
