Is Novartis’ Dividend Safe?

Is Novartis’ dividend safe?Novartis is one of the largest global drug manufacturers.

$14 billion in first quarter sales. 50 marketed products across 5 segments:

Pharmaceuticals: $7.8 billion in Q1 sales. Alcon: An eye care portfolio with $2.6 billion in Q1 sales. Sandoz: A generics manufacturer with $2.3 billion in Q1 sales. Vaccines: $215 million in Q1 sales (exiting). Consumer healthcare: $1 billion in Q1 sales (shifting to a joint venture).

However, Novartis’ faces patent risk.1. Diovan

– Sales fell 20% in 2013.– Sales fell 13% year-over-year to $803 million in Q1.– Diovan monotherapy generic expected to enter U.S. market in Q3.

• Diovan monotherapy represents 90% of U.S. Diovan sales.2. Zometa

– Sales fell 53% in 2013.– Sales fell 69% to $74 million in Q1.

Patent RiskLet’s consider the patent threat.

Diovan and Zometa still combined to generate $4 billion in sales for Novartis’ last year, suggesting more pain is ahead for its top line. The FDA has yet to approve a generic Diovan monotherapy; however, Novartis’ expects it will face off against generics in the second half of this year. Despite losing sales last year, revenue in its drug unit were essentially unchanged year-over-year in Q1 thanks to new drugs.

Novartis’ sales remain steady despite patent losses last year.

Reasons for dividend optimism

Fast growing therapies in the first quarter:

– Gilenya: An oral treatment for relapsing MS.• Sales up 31% to $552 million in Q1• Faces stiff competition this year from

Biogen’s Tecfidera and Sanofi’s Aubagio.

– Tasigna: A therapy for chronic myeloid leukemia.• Sales up 19% to $337 million in Q1.

– Galvus: A diabetes drug sold overseas.• Sales up 15% to $308 million

A rich platform of products and a solid pipeline of potential new therapies.Restructuring for growth:A deal with GlaxoSmithKline offers an opportunity to focus on growth markets.

•Novartis’ acquires Glaxo’s cancer products.• $1.6 billion in 2013 sales.• Will pay $16 billion to Glaxo.

•Novartis’ divests non-flu vaccines.• Receives $5.3 billion from Glaxo.

•Creates a consumer health joint venture.•Sells its animal health business.• Receives $5.4 billion from Eli Lilly.

•Net cash outflow = $7.6 billion.

Pipeline opportunity:28 phase 3 or pivotal programs.•6 new molecules.•Significant biosimilars program.http://www.novartis.com/downloads/investors/event-calendar/2014/2014-04-22-presentation.pdf

Reasons for dividend optimismA rich platform of products and a solid pipeline of potential new therapies.

Sales and earnings growth opportunity:

•The restructuring has analysts expecting that sales will climb next year.•Earnings are expected to accelerate through 2017.

Cash dividend payout ratioNovartis’ annual cash dividend payout ratio, which measures the percent of cash used to pay dividends after capex and preferred dividend payments, is high at 65%. However, that rate is in line with GlaxoSmithKline, Novartis’ partner on its consumer joint venture, and Sanofi, which markets Aubagio as a competitor to Novartis’ MS drug Gilenya. Novartis’ high payout ratio suggests that profit growth is important to Novartis’ ability to boost its dividend payment.

Aubagio is growing more quickly than Gilenya.

Dividend growthNovartis paid out $6.8 billion in dividends during 2013.

• Up $700 million from 2012.• Solid history of boosting dividend payout since inception

• Consistency suggests further dividend increases likely.

Current yieldNovartis’ dividend yield is 3%; however, Novartis’ has a lot on its plate and a high pay-out ratio which may create risk. The company has historically returned a significant amount of its cash flow to investors, so it’s likely Novartis’ dividend remains safe. However, dividend investors may want to wait until next year to see how patent headwinds play out, whether Novartis’ restructuring with GlaxoSmithKline delivers on its promise, and if Sanofi’s fast-growing Aubagio and Biogen’s top selling Tecfidera cut into Gilenya’s sales.

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