Reader Request - Novartis AG (NYSE:NVS)
10 July 2007Dividends Matter reader Jason has requested that we have a look at Novartis AG which trades on the NYSE under the symbol NVS. Let’s see if this company is worth adding to our dividend paying portfolio.
Company Profile:
From Yahoo Finance
Novartis AG engages in the research, development, manufacture, and sale of health care products.
For a complete profile, please check Yahoo Finance.
This is a large cap stock with a market capitalization of $129.09B and employs over 100,000 people.
Company Fundamentals:
I like to start my analysis with a look at return on invested capital. I was only able to find data from 1999 onwards. However, this shows very steady returns. The 5 year average is 16.50% and looks about right for the whole 8 year period.
Return on equity has been consistent. The 10 year average is 18.23% and the 5 year average is slightly lower at 17.79%. Last year’s ROE was 18.14%.
The equity growth rate has seen some fluctuations from a low of negative 2.13% in 2000 to a high of 24.51% in 2006. However, over the whole period, equity growth rate has been fairly steady at around 10%.
Earnings per share growth has also experienced fluctuations, but over time, the EPS growth rate of 9.12% over the 10 year period lines up nicely with the equity growth rate.
Sales growth rate has been consistent over the lat 5 years with an average growth rate of 12.76%.
Dividend Fundamentals:
Current dividend yield is 1.98%. That is slightly higher than the dividend yield of 1.89% offered by the S&P 500 index but lower than the 2.26% dividend yield offered by the DJIA. Hopefully a high dividend growth will make up for this lack of yield.
Looking at the dividend growth rate, the numbers in 1998 look odd. So I am going to discount them as it throws the whole average off. Looking at the last 8 years, the dividend growth has been 10.79%. Over the last 5 years, it has been 13.61%. However, in 2006, the dividend growth was negative 0.34%. Interestingly enough, when I visit the Novartis Investors Relations website, their dividend history shows steady growth and 10 consecutive increases in the yearly dividend. The discrepancy may be that Novartis is displaying the dividend in Swiss Francs while my data is in US dollars. Foreign companies add currency risk to your dividend equation.
Current payout ratio is 27.59% which is very conservative and leaves lots of room for the company to maneuver. And their cash flow growth rate has been running at around 9% increases over the 10 year period which is nice since it has been keeping up with the dividend increases and we all know it takes cash to pay for dividends.
Valuation Models:
From a yield perspective, this stock is trading at a discount. The 5 year average high dividend yield is 1.84%. However, the current dividend yield is 1.98%. By demanding a yield of 1.84%, the model price is $59.62. At the current price of $55.33, there is currently a 7.19% discount available to investors.
From Graham’s perspective, the stock is trading at a premium of 55.99% with a Graham number of $35.47.
For the discounted present value method, I used the following variables:
- future P/E of 17.40 (which is the current P/E and the historical low)
- future EPS growth rate of 10.10% (this represents the equity growth rate over the 10 year period). Analysts have forecast 13%, but I will go with my more conservative estimate.
- dividend yield of 1.84% (the 5 year average high dividend yield)
- future dividend growth at 0%. This was the tough one. I was not sure of what value to use here because of the fluctuations that have been seen in the past. So to be conservative, I went with 0% dividend growth.
With these variables, my model price is $42.07 which represents a premium of 31.53%.
Check out my calculations here.
Conclusion:
All in all, Novartis AG looks like a solid company. The only real issue showed up when we started analyzing the dividend growth rates. Novartis AG prides itself on having increased their dividend over the last 10 years. Unfortunately, with the currency exchange, it does not translate into a dividend increase in the US.
If you want a dividend payer that offers some different currency exposure, Novartis looks like a good prospect.
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on July 10th, 2007 at 11:34 am
Thanks for the analysis! I like blog allot!
on August 1st, 2007 at 6:20 pm
Novartis has put together a brilliant marketing campaign to increase sales. The idea; to get kids on Ritalin through school psychologists and psychiatrists was pure genius. They came up with disorders; attention-deficit-disorder, mood-disorder, obsessive compulsive-disorder, anxiety-disorder, conversion-disorder, panic-disorder, phobic-disorder and on and on. All you have to do is hyphen disorder onto an emotion or a disability, whip up a drug to handle it and presto, the money pours in.
And now the other drug companies are copying Novartis.
The best thing is that these new clients as they get older will need more and more Ritalin, as it is basically an amphetamine and most will be on some form of it for the rest of their lives; thus insuring growth. And now I see that they are working on getting babies on it. Wow! Will the brilliance ever cease?
The outrageous allegations that Ritalin is a starter drug that creates addicts that then do street crime are just spurious charges done by people who are jealous of the money that Novartis and their investors make.