Drug Giant Generates Cash with Swiss Efficiency

02/09/2011 12:21 pm EST


Timothy Lutts

Publisher, Cabot Heritage Corporation

Novartis’ clocklike growth and dividends offer a measure of certainty in an uncertain world, writes Timothy Lutts of Cabot Wealth Advisory.

Economically, Switzerland is an interesting place.

It sits at the geographic heart of Europe, but it doesn’t use the euro, preferring instead to stick with the Swiss franc, which means that as the value of the euro has fallen in recent months, life for travelers to Switzerland has been become even more expensive, relatively.

Famously neutral, the country hasn’t fought a war since 1847. Its defense budget is less than 1% of GDP. The US’s is more than 4%.

  • Agriculture is subsidized, so the country can feed itself.
  • Cars and fuel are expensive, so many people ride bicycles, even in January.
  • The public transportation network is a model of efficiency.
  • Per capita income is the eighth-highest in the world.
  • And the country is clean.

But none of this would be possible without the revenue generated by the deposits in those famously secretive Swiss banks, which may hold as much as 33% of the world’s offshore investments and contribute nearly 12% of Switzerland’s gross domestic product.

And there’s no certainty those assets will remain in Switzerland, as a global trend toward growing transparency—thanks in part to Wikileaks—makes large-scale criminal activity (including tax evasion) more difficult, and as Singapore develops into a strong competitor in the offshore banking business, particularly from Asian parties.

Still there are opportunities for investors in Switzerland. Which brings me to my recommendation:

A Steady Grower With Yield

It’s pharmaceutical giant Novartis (NVS), which is headquartered in Basel, Switzerland, but does business in 140 countries all over the world. Created in 1996 from the merger of Ciba-Geigy and Sandoz, the company generated $51 billion in revenues last year. Its biggest market was the US, accounting for 32% of revenues. Its biggest revenue-generators included Gleevec, Diovan, Lucentis, Amoxicillin, Augmentin, Claritin, and Excedrin. And it’s growing at a good pace, in large part by acquiring smaller competitors with valuable properties. Last year it acquired eye-care giant Alcon.

In the fourth quarter of 2010, Novartis saw revenues grow 10% from the year before, to $14.5 billion. Profit margins were 18.7%. And the dividend yield was a solid 3%.

It’s not a hot stock; NVS is owned by some 600 mutual funds, most of which are in for the long haul. But it is decently valued.

In fact, the latest issue of Cabot Benjamin Graham Value Letter says that the stock, currently trading at $56, can be bought anywhere under $55; buying low gets you a margin of safety. And it can be held until at least $72.90, above which it will be overvalued and therefore carry excessive risk.

I think it’s a good choice for conservative growth investors who like the stability of some income from dividends.

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