Danish drugmaker Novo Nordisk (NVO -1.21%) is one of the world's largest pharmaceutical companies with a market capitalization of nearly $360 billion. It sports a diverse portfolio of insulin products, diabetes drugs, and obesity treatments. Novo Nordisk has been growing steadily over the years, thanks to its strong commitment to innovation in the area of metabolic disorders and expanding presence in emerging markets. But is Novo Nordisk a good dividend stock for income investors? Let's dig deeper to find out.
Dividend policy and yield
Novo Nordisk pays dividends twice a year, in March and August, based on its annual earnings. The dividend payout ratio, which measures the percentage of earnings that are distributed as dividends, has been hovering around 50% since 2017, indicating a balanced approach between rewarding shareholders and reinvesting in the business.
Novo Nordisk's dividend yield, which measures the annual dividend per share divided by the share price, is currently 1.1%. This is lower than the average yield of 2.28% for the healthcare sector and 1.54% for dividend stocks listed on the S&P 500. Moreover, Novo Nordisk's dividend growth rate hasn't been particularly impressive of late.
Dividend growth rate and total return
Novo Nordisk has grown its dividend at a compound annual growth rate (CAGR) of 7.6% over the past five years, falling well behind its earnings growth rate of 49.7% over the same period. However, the drugmaker's dividend growth rate is perfectly in tune with the average among large-cap healthcare stocks (average growth rate of 7.6%) but below average compared to the S&P 500 index (historical average dividend growth rate of 8.71%).
Novo Nordisk's dividend growth has played a modest part in the company's exceptional total returns on capital for shareholders, which combines both capital appreciation and dividend income. Over the past 10 years, for instance, Novo Nordisk has delivered a total return of 504% (assuming dividends were reinvested), compared to 225% for the S&P 500 index.
NVO Total Return Level data by YCharts
Dividend outlook and risks
Novo Nordisk's dividend outlook is overwhelmingly positive, as the company expects to grow its earnings by high double-digit percentages over the course of 2023 and 2024. As the company has been maintaining a similar dividend payout ratio over the past several years, further dividend increases are highly likely in the future.
Novo Nordisk's dividend growth is supported by its strong competitive advantages in the diabetes market, where it holds a leading market share of around 30%. The company has a diversified portfolio of products that cater to different segments of the diabetes population, such as insulin-dependent and non-insulin-dependent patients, as well as patients with obesity and cardiovascular complications.
The one drawback is that most of this anticipated growth is expected to come from a single drug -- the glucagon-like peptide-1 receptor agonist semaglutide. Semaglutide is currently marketed as both a type 2 diabetes medication and a weight loss treatment. It is sold under the brand names Ozempic, Wegovy, and Rybelsus. Novo Nordisk's heavy reliance on one drug for the bulk of its top- and bottom-line growth creates a unique risk for income investors.
Verdict
Novo Nordisk doesn't offer a mouth-watering yield, but its shares have nonetheless delivered outstanding returns for stakeholders over the past decade. The company has a strong competitive position and a promising innovation pipeline in the metabolic disorder space, which should support its earnings and dividend growth in the future. As such, this big pharma stock screens as a compelling buy for investors on the hunt for a reliable source of passive income.
