Novartis: Healthy Returns

05/24/2016 8:00 am EST

Focus: STOCKS

Josh Peters

Editor, Morningstar DividendInvestor

Our latest featured recommendation is a Swiss-based firm that derives its strength from a diversified operating platform of branded drugs, generics, eye-care products, and consumer products, explains Josh Peters in Morningstar DividendInvestor.

Although most rivals focus solely on high-margin branded drugs, Novartis (NVS) runs complementary operations that reduce overall volatility and create cross-segment synergies.

For example, not only does its generic business, Sandoz, serve to grab a portion of the billions of dollars in competitive branded products losing patent protection during the next 10 years, but it also extends the life cycle of in-house products as patents expire.

The acquisition of Alcon in 2011 boosted Novartis’ consumer and drug operations with sales in the fast-growing eye-care business.

The pharmaceutical segment is poised for moderate long-term growth driven by new pipeline products and existing drugs.

Novartis differentiates itself because of its sheer number of blockbusters, including Gilenya for multiple sclerosis and Afinitor and Tasigna for cancer.

Also, the company has generated a superior late-stage pipeline with recent launch of heart failure drug Entresto, which is poised to become a major blockbuster.

Despite the recent Diovan patent loss and the current expiration for Gleevec, the combination of a strong pipeline of new products and a diverse, well-positioned operating platform should translate into steady growth over the long term.

Economically defensive, well diversified in terms of regions and products, and financially conservative, Novartis is in excellent shape to support its dividend.

We expect sales to grow 3% – 4% annually through 2023, which should also permit margins to expand. Share buybacks round out our expectation of 5% – 6% average annual gains in EPS.

I don’t like Switzerland’s 15% withholding tax on dividends, but the firm’s other merits may be sufficient to look past that drag.

Yielding 3.7% and available at an 18% discount to our fair value estimate, Novartis is priced for long-term total returns of 8% – 9% a year with modest risk.

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By Josh Peters of Morningstar DividendInvestor

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