Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out the previous selection.
This week, we'll turn our attention to global pharmaceutical juggernaut Novartis (NYSE:NVS) and I'll show you why its pipeline and dividend growth both look promising moving forward.
The dreaded "PE"
Most of us know P/E to mean price-to-earnings ratio, but it can stand for something far scarier in the pharmaceutical industry: patent expirations. The patent cliff is the No. 1 enemy of Big Pharma since the approved drugs in a company's pipeline only have 20 years of protection from biosimilar competition (and often half of that time is spent in clinical trials). Therefore, biopharmaceutical companies need to constantly be innovating otherwise their revenue stream will dry up.
Novartis is no stranger to the loss of blockbuster drugs to expirations. Last year the company lost its exclusivity in the U.S. on Diovan, a drug used to treat hypertension and heart failure. To provide context to this loss, Diovan accounted for $5.67 billion of Novartis' $32.5 billion in pharmaceutical product sales in fiscal 2011. In fiscal 2013, Novartis anticipates a negative generic competition impact (primarily due to Diovan and Zometa) of approximately $2.3 billion . Yet, beyond Diovan, Novartis is set for some clear sailing for about the next four years.
The same can't be said for some of Novartis' peers. Eli Lilly (NYSE:LLY), for instance, is facing generic competition between 2010 and 2017 that could put three-quarters of its revenue stream at risk. To make matters worse for Eli Lilly, it has had little luck with late-stage pipeline products recently with experimental Alzheimer's drug solanezumab missing its primary endpoint in late-stage trials last year (not all hope is lost as it's being tested in a longer-term study overseas) and in May announcing it was discontinuing its late-stage study of enzastaurin as a second-line treatment for diffuse large B-cell lymphoma.
The Novartis advantage
Success in the pharmaceutical sector basically comes down to one factor: Can you innovate? For Novartis, the answer is looking like a decisive, "Yes!"
Since the Food and Drug Administration introduced its new breakthrough therapy designation, or BTD, no company has received more BTD's than Novartis. It received a BTD on LDK378 for the treatment of ALK-positive non-small cell lung cancer in the first-quarter, a BTD on RLX030 for the treatment of heart failure in the second-quarter, and had BYM338 receive a BTD in the third-quarter for sporadic inclusion body myositis. The advantage of the BTD is that it can expedite bringing a new drug to market by allowing a pharmaceutical company to submit an application using early and mid-stage data as the basis. This could mean fewer R&D costs and longer periods of patent exclusivity.
You can even extend Novartis' advantage out a bit further if you include the fact that Novartis' Femara is the combination therapy used with Pfizer's (NYSE:PFE) breast cancer drug palbociclib, which has also received a BTD. Early estimates for Pfizer's palbociclib from Wall Street say it could reach $5 billion in peak sales, which would be just another way for Novartis to extend the sales life of its existing drugs.
Novartis' business diversity and the growth of existing products are two other points where it excels.
Based on Novartis' third-quarter results released last week, nearly 25% of its $7.9 billion in pharmaceutical sales came from emerging markets which demonstrated a faster growth rate of 8% compared to a sales improvement of just 3% in established markets. But let's not forget that Novartis also has a diagnostics and vaccine division that saw core operating income increase by 145% in the third-quarter, and it owns Sandoz which is a generic drug powerhouse that saw sales climb 11% to $2.3 billion last quarter.
Existing product growth has also been strong. Oral multiple sclerosis drug Gilenya delivered third-quarter sales of $518 million, which is 63% higher than what it delivered in sales at this time last year. Earlier in the year my contention had been that Gilenya would struggle with the U.S. FDA approval of Biogen Idec's (NASDAQ:BIIB) relapse-remitting MS drug Tecfidera. In trials, Tecfidera led to a drop of 71% to 99% in new or expanding lesions and it offered a very favorable safety profile. However, I underestimated the demand for oral MS products in the U.S. and around the world. There's plenty of space here for Biogen Idec and Novartis to co-exist and deliver big gains.
Show me the money, Novartis
Yet one of the most prominent allures of big pharma is the fact that the high margins yielded from their branded drug portfolio and clear patent picture lead to incredible cash flow and somewhat steady dividend growth.
Some of you might look at Novartis and be disappointed that it just pays out one dividend annually rather than a quarterly or semi-annual stipend. Well, don't be: It all amounts to the same in the end! Novartis' annual dividend has been increase in each year (16 years) since it first began paying an annual dividend in 1997 and has quintupled in size since 2001.
Based on its current payout of $2.53 in 2013, Novartis is yielding 3.2%, good enough for the 14th highest yield in the entire health-care industry, which consists of nearly 575 publicly traded stocks, and handily trouncing any CD rate that your bank would offer you.
We also know this dividend payout is pretty safe and likely to head higher given that it has no major patent expirations over the next four years, is paying out just 49% of its fiscal 2013 earnings as a dividend which would certainly leave ample room for future stipend hikes, and could have as many as 17 new drug application filings and 19 supplement NDAs (for new indications) before the end of 2016.
Even though you'll find some big yields in Big Pharma, you have to be willing to dig beneath the surface to see if you're investing in a company with a sustainable pipeline or if your company is set to dive headfirst over the patent cliff. In the case of Novartis, it has an extensive pipeline of promising new and experimental products and is utilizing its business diversity and the emerging markets to fully capitalize on its growth opportunity. With a 16-year streak of dividend increases already in the books and a reasonably low payout ratio of just 49%, Novartis just might be a great dividend stock you can buy right now!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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