Novo Nordisk – A Safe Dividend Play with Decent Growth Prospects

Summary

  • Robust presence in the global Diabetes care market, with 27% market share
  • Extensive geographical presence, strong product pipeline and 90 years of R&D expertise
  • Emerging market and new products are key growth drivers

This article has been written by Sneha Shah for The Dividend Guy.

Investment Thesis

Healthcare stocks offer a safe dividend stream for investors given their nearly recession-proof nature. The sector offers immense potential owing to a growing senior population that drives demand for medical products.

Novo Nordisk is a leading global pharmaceutical company having a strong leadership position in diabetes care.  About 27.7 million people use its diabetes care products worldwide. The company has developed strong R&D expertise and a strong product pipeline pumping out market leading medicines. It is also slowly but steadily expanding its footprint in emerging markets, given the pricing challenges that healthcare companies are currently facing in the USA.

Given Novo Nordisk’s leadership, the company stands in a good position to benefit from a growing population suffering from chronic diseases like diabetes, obesity and others.

Understanding the Business

Novo Nordisk is a global healthcare company. Headquartered in Denmark, Novo Nordisk has operations in 79 countries and markets its products in more than 170 countries. The company has over 90 years of experience in diabetes care and other serious chronic conditions such as haemophilia, growth disorders and obesity.

By geography, North America constitutes its largest market accounting for 52% of total sales in 2017, followed by Europe (19%), AAMEO region (11%), China (10%), Japan, Korea (5%) and Latin America (3%).

By product line, diabetes care is the largest revenue generator accounting for 81% of 2017 revenues, followed by haemophilia (9%), growth hormones (6%), obesity (2%) and other biopharmaceuticals (2%).

Revenues

Source: Ycharts

Novo Nordisk commands a 27% market share in diabetes care and 45% in insulin volume market share. It is the only company with a full portfolio of novel insulin and GLP-1 products. Diabetes care and obesity have become widespread in the U.S., with an increasing diabetic population in the U.S. and Novo Nordisk stands to benefit from this trend.

Tresiba and Victoza (drugs for diabetes care) are the largest growth drivers, growing by 85% and 18% respectively. Its semaglutide product, Ozempic, also received FDA approval and should further fuel growth of its diabetes-care line of products. Saxenda, which is a global leader in the anti-obesity market is also showing good growth. Further, Novo Nordisk is also investing to roll out a new generation insulin portfolio.

More than 90 years of research and an extensive geographical presence are Novo Nordisk’s other strengths. International operations, which cover more than 190 countries, grew by 5% last year. The company is adopting a ‘market fit’ approach to grow this business. Emerging markets also present a compelling growth opportunity for Novo Nordisk as can be seen from the graph below:

Management expects sales growth of 2%-5% (in local currency) in 2018.

Earnings

Source: Ycharts

The diabetes care and obesity segments accounted for 78% of the total operating profit while the biopharmaceuticals segment constituted the remaining 22%.

Sales and distribution are the biggest cost and accounted for nearly 30% of sales in the most recent quarter.

The company is making investments in additional production capacity and expenses to support the commercialisation efforts for the launch of Ozempic. In addition, Novo Nordisk is also expanding its R&D efforts into other serious chronic diseases with unmet medical needs. It is developing stem cell therapy for type 1 diabetes, and developing a biological medicine in a tablet.

Novo Nordisk is targeting an operating profit growth of 5% on average and expects to convert 90% of its earnings into cash for shareholders. The company is expecting to drive margins through continuous cost control measures and sales growth. It has a strong pipeline of medicines which should further fuel growth.

Dividend Growth Perspective

Source: Ycharts

Source: Novo Nordisk

Novo Nordisk is a shareholder friendly company offering a dividend yield of 2.35% along with large share buybacks every year. The company has paid uninterrupted dividends for 20 years in a row. Once you bring NVO’s cash dividend in its currency, you can see that the company could make the Achievers list if it was a U.S. company.

The company’s next payout is expected to increase by 3%, with a reasonable payout ratio of 50% indicating room for further growth.

The company has a good cash balance and management has the flexibility to take on debt in case of any cash shortfalls.

Source: Ycharts

Investors have reasons to be happy as the company also announced a new share repurchase programme of up to DKK 14 billion (US$ 2.24 billion) for the year.

Potential Downsides

Novo Nordisk faces competition from generic drug companies. Teva Pharmaceuticals’ new generic drug poses a big threat to Novo Nordisk’s flagship diabetes drug Victoza, which is one of its biggest brands.

Moreover, U.S. healthcare budgets and prices will continue to remain under pressure as healthcare costs in the country are quite high as compared to other nations. There is tremendous pressure on the healthcare system to lower cost. This might adversely affect sales growth and profitability.

New products from competitors and competition for older drugs also affect volumes and create pricing pressure.

Having a large international presence, Novo Nordisk is also sensitive to currency fluctuation. In fact, the company reported disappointing FY 17 results owing to the fact that almost every currency in the world declined against the Danish krone in 2017.

Valuation

Source: Ycharts

NVO is trading at P/E of 19.48x which is lower than the industry average of 29x. Its debt to equity is also lower at 0.03, when compared to the industry median.

Final Thought

The International Diabetes Federation (IDF) estimates that the number of diabetic people will increase to 629 million by 2045 from 425 million today. Novo Nordisk has a huge growth potential as only 6% of the diabetes population is being treated with its products. Even though growth has slowed in recent times, Novo Nordisk remains profitable given its heavy R&D expenditure, expansion into other therapy areas and partnerships. The company has a good long term visibility given its dominant position in the diabetes market. The recent correction offers a good entry point for investors with a long term horizon.

 

Disclosure: I do not hold NVO in my DividendStocksRock portfolios.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

It’s Never Enough When It’s Apple

Summary

  • Apple just finished another record year
  • Haters gonna hate
  • Shareholders gonna smile

I remember the first time I purchased shares of Apple (AAPL). At first, it was supposed to be a short-term investment as there was a timely opportunity. I bought my first shares before the split, when the stock was trading under $400 (therefore, under $57 after the 1:7 split). At that time, many rumors were going around.

Apple’s iPhone is going to be eaten-up by Samsung’s smartphone”

“The company is a one trick pony”

“We have reached Apple’s full potential; it will only go down from now on”

A few years and over 100% return later, Apple is struck by similar bad mouth sayings.

“The iPhone X is a failure”

“Apple’s battery sucks”

“The company is programming smartphones obsolescence, Apple is evil”

It’s funny to see that for each Apple fan, there is probably a hater. It’s only fair. But as a serious investor, you should neither be a fan or a hater. Emotion has no place when it’s time to take a look at a stock. Now that we have set our feelings aside, let’s take a deeper look at Apple.

Understanding the Business

Apple has been called a one trick pony for several years and this is not entirely false. Apple is one of the largest smartphone makers in the world. But there is more than that. While AAPL iPhone represents about half of Apple’s sales, the company is building a strong “services” segment.

As you can see, Apple’s financial performances are still highly dependent on the next generation of iPhones. You can see what happens when there is a new phone on the market; quarterly sales more than doubled from Q4 2017 to Q1 2018.

The company continues to sell iPads and Macs but it’s definitely not part of the core business model anymore. The company’s main strength relies on the quality of their product and the ecosystem it builds around them. I think the Internet of Things (IoT) term come from all Apple’s devices talking to each other!

An Eye on the Latest Quarter

Non-GAAP EPS of $3.89, up by 16%, beat estimates by $0.04

Revenue of $88.3B, up by 12.7%, beat estimates by $670M.

Dividend of $0.63/share, no increase.

What the CEO Said

“We’re thrilled to report the biggest quarter in Apple’s history, with broad-based growth that included the highest revenue ever from a new iPhone lineup. iPhone X surpassed our expectations and has been our top-selling iPhone every week since it shipped in November,” said Tim Cook, Apple’s CEO. “We’ve also achieved a significant milestone with our active installed base of devices reaching 1.3 billion in January. That’s an increase of 30 percent in just two years, which is a testament to the popularity of our products and the loyalty and satisfaction of our customers.”

What I Say

I’m not surprised by this record quarter. I expected strong sales for Apple’s new iPhone. There is definitely a continuous interest for premium products (at a premium price!). It seems it’s never enough for some specialists, but I will gladly hold my shares. I’m more interested to see Apple repatriate its offshore cash and how it will use it in the upcoming months.

Growth Vectors

Source: Ycharts

Wow… have you seen this graph? Both revenues and earnings are going higher and higher at the same pace! Apple first growth vector remains its iPhone. Each time there is a new model coming out, the market goes a little crazy. Off course, it’s not the same hype as it was when Apple launches its iPhone 4 for example. Still, there is a continuous interest for new versions.

Second, Apple is growing its services division at a double digit pace. During their most recent quarter, this segment posted at +18% year over year growth. Services such as Apple Pay, Apple Music and Apple TV are just the beginning. The more people buy iPhones, the more they are inclined to use services attached to them.

Third, the Tax bill will make additional money available for Apple to use. I expect additional shares repurchase and dividend increase. This is definitely a plus if you are a shareholder!

Dividend Growth Perspective

Apple shows 5 years of consecutive dividend growth. This makes it half way of making the elite Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

Source: Ycharts

During this 5 years period, AAPL shows a +66.42% total dividend growth for a 10.72% CAGR. With strong sales growth and consistent earnings progression, I expect the company to keep up with a double-digit dividend growth commitment for several years. Don’t be fooled by the 1.50% yield as the company will double its payment every 7 years going forward. AAPL meets my 7 dividend growth investing principles.

Source: Ycharts

Both payout and cash payout ratios are very low. This is another reason why I believe in a double-digit dividend growth policy for the next decade. Apple’s business model is based on generating tons of cash flow on a quarterly basis. This is exactly what I’m looking for as a dividend growth investor.

Potential Downsides

To be honest, I don’t see that many dark clouds coming over Apple’s head at the moment. The company enjoys strong growth vectors and whatever haters say about AAPL’s new iPhones or watch, the company keeps showing strong sales.

However, there are no techno companies sheltered from innovation. I think Apple protects its core product with a strong product ecosystem and additional services. Yet, the coming of a new popular phone hurting AAPL sales is always a possibility.

Valuation

What is the right price to enter in a position in AAPL? My guess would be today is the best moment after yesterday. The worst timing is tomorrow.

Source: Ycharts

The company continues to trade at reasonable levels considering its growth potential. When I use the DDM, I get a current price being slightly undervalued right now:

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $2.52
Enter Expected Dividend Growth Rate Years 1-10: 10.00%
Enter Expected Terminal Dividend Growth Rate: 8.00%
Enter Discount Rate: 10.00%
Discount Rate (Horizontal)
Margin of Safety 9.00% 10.00% 11.00%
20% Premium $389.63 $193.54 $128.23
10% Premium $357.16 $177.41 $117.54
Intrinsic Value $324.69 $161.28 $106.86
10% Discount $292.22 $145.15 $96.17
20% Discount $259.75 $129.02 $85.48

Please read the Dividend Discount Model limitations to fully understand my calculations.

I can’t really use a strong dividend growth rate at the moment. However, the moment management announce their 2018 dividend raise; the stock will appear undervalued by 10%.

Final Thought

As I mentioned earlier in this article, the right timing to buy Apple is always today. I think the company will continue to thrive in the upcoming years and its shareholders will be rewarded with juicy dividend raise year after year. Don’t wait until AAPL pays a 3% yield to jump on the train.

Seriously, if you made it this far, it’s because you liked what you read. Don’t be a stranger; leave a comment and tell me what you think! I’m asking you one more thing; click on “follow” button (it’s orange, you can’t miss it!) and you will get notified each time I write a great piece like this one.

 

Disclosure: I do hold AAPL in my DividendStocksRock portfolios.

Additional disclosure: The opinions and the strategies of the author are not intended to ever be a recommendation to buy or sell a security. The strategy the author uses has worked for him and it is for you to decide if it could benefit your financial future. Please remember to do your own research and know your risk tolerance.

 

Diageo: Shiny Bottles Lead to Shiny Dividends

Summary

  • Diageo is a leader in premium spirits industry, it will surf the current economic tailwind.
  • Emerging markets start to get some traction as middle class seeks recognitions and claim a higher status through their lifestyle.
  • Unfortunately, DEO is overpriced right now.

Investment Thesis

DEO will benefit from the good standing of the current economy. Consumers around the world are optimistic in their future, and they are more willing to spend. DEO enjoys strong pricing power, and its brand portfolios are protected with premium names. Diageo also invests in an important sales team in order boost its product’s popularity at all times. The company will continue to pay a solid 2.50% dividend. Finally, the rising income in emerging markets will eventually lead to additional customers for Diageo and its premium spirits. Unfortunately, the DDM calculation doesn’t justify the current price.

Understanding the Business

Diageo is another “sinner’s club” dividend stock. The company, based in England, evolved as the result of a massive merger of Grand Metropolitan and Guinness back in 1997. DEO is a global spirits and beer marketer and distributor. Diageo largest products are scotch, beer and vodka. The company manages over 200 brands served in 180 countries. In other words, if you drink alcohol in any form, you have definitely tasted one of Diageo brands. Famous names such as Guinness, Smirnoff, Johnnie Walker, Captain Morgan and Baileys are among a long list of brands owned by Diageo. Here’s an idea of what they sell across the world:

Source: DEO 2017 Annual Report

Revenues

Source: Ycharts

Keep in mind that all graphs are in USD, but the company reports their figures in British pounds. As you can see I the following graph, both currencies had their share of fluctuation over the past 10 years:

 

Source: Ycharts

A clearer version of their sales can be found in their 2017 annual report where the company showed strong organic growth last year:

Diageo is not only a leader in the spirit industry, it is also benefiting from premium brands. In a world where your status can be determined by what you drink, owning well-known and pricey brands are a key element against your competitors. DEO protects its market shares through strong branding and enjoys pricing power. With its wide brand portfolio, it has become a great partner in the retail business (bars and restaurants are looking for Diageo’s products).

Earnings

Source: Ycharts

Then again, here are the past year’s performance in DEO main currency:

Diageo went through a difficult couple of years where EPS decreased since 2013. Management worked harder to improve their margin and their marketing teams put additional focus on sales. After spending nearly £1 billion in marketing during their latest interim period, DEO is back to solid organic growth.

Source: DEO 2018 interim result presentation

It will be interesting to follow DEO earnings in the upcoming years to see if it was just a temporary rebound, or a new trend. My guess is that the economy will continue to push DEO higher in the future.

Dividend Growth Perspective

Diageo pays dividend twice a year. Unlike most American companies, DEO pays 2 different amounts each year. This explains the roller coaster graph you are about to see:

Source: Ycharts

DEO shows 6 consecutive years with a dividend increase, according to Dividend.com. This makes it 4 years a part of making the elite Dividend Achievers list. The Dividend Achievers Index refers to all public companies that have successfully increased their dividend payments for at least ten consecutive years. At the time of writing this article, there were 265 companies that achieved this milestone. You can get the complete list of Dividend Achievers with comprehensive metrics here.

DEO is in a similar position to BUD. Both companies pay semi-annual dividends in another currency. This creates an additional fluctuation in your portfolio. DEO shows a solid dividend growth policy, and a payout ratio under 50%. You can expect additional increases in the years to come… unless DEO makes more acquisitions and slows down its dividend growth policy. If business remains basically the same, we expect DEO to increase its payout by mid-single digits over the upcoming years.

Source: Ycharts

Potential Downsides

The spirit industry is more cyclical than the beer business. Since DEO has a great niche in premium brands, those are more affected during economic downturns. The company is also subject to additional regulations and taxes coming from governments. On one side, people like alcohol, but on the other, some push for stronger regulations. There is always a risk of contamination or fire in its ageing facilities. Finally, as the bulk of DEO expenses is in British pounds, the fact that England is leaving the Euro may create additional volatility in its financial statements.

Valuation

Diageo is a solid company with a solid reputation. Unfortunately for potential new shareholders, DEO stock hasn’t been trading at a discount recently. DEO has jumped by about 34% between January 2016 and January 2018 and most of the gain is due to PE expansion.

Source: Ycharts

Digging deeper, I’ve used the dividend discount model to find a fair price for DEO. I’ve used a 5% dividend growth rate for the first 10 years and increased it to 6% as a terminal rate. DEO is a leader in an industry where brand names mean everything. It will be very difficult for any company to match the Diageo brand recognition (and marketing budget to do so).

Input Descriptions for 15-Cell Matrix INPUTS
Enter Recent Annual Dividend Payment: $3.21
Enter Expected Dividend Growth Rate Years 1-10: 5.00%
Enter Expected Terminal Dividend Growth Rate: 6.00%
Enter Discount Rate: 9.00%
Discount Rate (Horizontal)
Margin of Safety 8.00% 9.00% 10.00%
20% Premium $187.13 $125.19 $94.20
10% Premium $171.54 $114.76 $86.35
Intrinsic Value $155.94 $104.32 $78.50
10% Discount $140.35 $93.89 $70.65
20% Discount $124.76 $83.46 $62.80

Please read the Dividend Discount Model limitations to fully understand my calculations.

Unfortunately, DEO is not showing as a screaming buy right now. I obviously don’t think DEO price will fall by more than $30 in 2018 to meet the DDM fair price. However, I highly doubt there is lots of growth potential for a dividend growth investor.

Final Thought

Diageo manages an impressive brand portfolio of spirits and alcohol products. Their names and the money the company keeps spending each year to maintain their standards make it almost impossible for new competitors to enter this market. The upcoming years look bright, but it is already priced in. While Diageo is a solid company, I will wait before I have another glass.

Disclaimer: I do not hold DEO in my DividendStocksRock portfolios.