Dividend stocks can have a powerful effect on a portfolio's performance over the long run. As such, it's generally a good idea to hold a handful of these stocks in any well-diversified portfolio.
Choosing the right dividend payer can be tricky, though. In the healthcare sector, for instance, we've seen dividend-paying companies lose top-selling drugs to the patent cliff, causing their free cash flow to plummet almost overnight.
While healthcare stocks such as GlaxoSmithKline (NYSE:GSK) or Pfizer (NYSE:PFE) might look compelling based on their comparatively high yields, it's a good idea to carefully check under the hood of any Big Pharma these days before deciding whether to buy. With that in mind, let's dig into the French biopharma Sanofi (NYSE:SNY) to see if its enticing 3.41% yield is worth considering as part of your dividend portfolio.
How does Sanofi stack up next to other Big Pharmas?
Like most of its peers, Sanofi has seen earnings drop in a big way this year. Specifically, Sanofi's diluted earnings per share have fallen by over 25% in the past 12 months.
Even so, its share price has still ticked higher by roughly 8% so far in 2014. Investors appear enthusiastic about the company's late-stage clinical pipeline, headlined by a long-acting form of its best-selling diabetes drug Lantus (Toujeo) and the PCSK9 inhibitor alirocumab, indicated for hypercholesterolemia. The Street expects these two key drugs to help EPS rebound next year, leading to a reasonable forward P/E of 14.6.
To put these numbers into context, Sanofi's closest peers on market cap and dividend, Glaxo and Pfizer, have forward P/Es of 14.2 and 13.2, respectively. Overall, all three of these household names have forward P/Es well below the sector average of 24, making them look relatively cheap.
Sanofi's forward P/E ratio looks particularly difficult to estimate next year for a variety of reasons. Chief among them, Sanofi recently signed a high profile licensing deal with MannKind Corp. (NASDAQ:MNKD) to market the company's newly approved inhaled insulin product Afrezza. Given that the insulin market is growing at breakneck pace and already supports multiple blockbuster products, Afrezza could have a major impact on Sanofi's bottom line next year.
Sanofi has a rocky dividend history
As shown by the chart below depicting the portion of Sanofi's profits distributed as dividends, the company's payouts have been uneven over the years but have steadily risen:
Then again, dramatic swings in total dividend payouts aren't uncommon among healthcare stocks, as is evidenced by its peers:
What's important to bear in mind is that healthcare companies frequently use their free cash to reinvest in R&D, promotional activities, or to acquire other companies. Dividend payouts therefore tend to take a hit as a result, producing the wild swings shown in the charts above.
Sanofi's stock offers a decent yield, reasonable growth prospects, and a payout history similar to its peers. However, I am concerned with the company's top- and bottom-line projections moving forward. The loss of exclusivity for Lantus next year could cause cash flow to dry up in a hurry. Per the second-quarter, for example, Lantus sales composed a whopping 22.8% of total drug sales and was one of the company's fastest growing products overall.
Although Sanofi appears to have a plan in place to soften the blow from Lantus' patent expiration, Glaxo's troubles replacing Advair revenue with newer respiratory drugs like Breo Ellipta shows the difficulties that lie ahead. In short, I doubt there will be a seamless transition from Lantus to Toujeo in terms of market share.
The wild card on the earnings front, however, will be Afrezza. If the drug lives up to some of the more bullish expectations, Sanofi may be able to bridge this gap faster than many of its peers, making it a key product to keep track of moving forward.
Overall, my take on Sanofi is that it isn't a "must-own" dividend stock -- largely because of the lingering questions over its revenue sources and free cash flow in the years to come. That said, the stock looks fairly valued in relation to its Big Pharma peers, which are struggling with similar problems.
George Budwell has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.