Novo Nordisk: Beaten-Down Valuation and a 3% Dividend Yield - Sure Dividend Sure Dividend

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Novo Nordisk: Beaten-Down Valuation and a 3% Dividend Yield

Published February 6th, 2017 by Bob Ciura

The health care sector is filled with dividend growth stocks. Just a few of the best include Johnson & Johnson (JNJ), Abbott Labs (ABT), and Cardinal Health (CAH).

These stocks are all Dividend Aristocrats – stocks with 25+ consecutive years of dividend increases. You can see the list of all 51 Dividend Aristocrats here.

But not all healthcare stocks are thriving…

On February 2, Novo Nordisk (NVO) posted disappointing quarterly results and cut its future outlook. The news sent the stock tumbling 8%, which now trades near a five-year low.

In a way, it was appropriate for the news to come on Groundhog Day. This was the third time in the past six months that the company has cut its earnings outlook.

Novo Nordisk attributes its worsening outlook to heightened political risk in the U.S., its biggest market.

The good news, is that the prolonged downturn has presented investors with an attractive buying opportunity.

Financial Results Overview

Along with its fourth-quarter and 2016 financial results, Novo Nordisk reduced its forecast for 2017. Novo Nordisk now sees full-year revenue in a range of down 1%, to up 4%. Previously, the company had forecast mid-single digit sales growth this year.

In addition, Novo Nordisk warned operating profit is likely to be between a 2% decline and a 3% increase for the year. Its prior guidance called for low-single digit growth in operating profit.

Management believes the reduced guidance is warranted, because of falling drug prices in the U.S., and the potential for further intervention by the new administration.

In addition, Novo Nordisk is seeing intensifying pressure from generic competition.

Falling drug prices would hit Novo Nordisk hard, since approximately 47% of the company’s annual sales come from outside North America.

NVO Regions

Source: 2016 Earnings Presentation, page 5

Aside from heightened regulatory risk, Novo Nordisk is seeing pressure from generic competition. Teva Pharmaceuticals (TEVA) recently announced a generic competitor to Novo Nordisk’s flagship diabetes drug Victoza, one of its biggest sellers.

Victoza sales increased 12% in 2016, to $2.9 billion. Victoza alone accounted for more than one-third of the company’s revenue growth last year.

NVO Victoza

Source: 2016 Earnings Presentation, page 6

Victoza is Novo Nordisk’s crown jewel. The company has a lot to lose from generic competition, as Victoza controls half of the U.S. GLP-1 insulin market.

NVO Market

Source: 2016 Earnings Presentation, page 9

This is why investors are focusing on the company’s reduced outlook, rather than its performance in 2016, which was quite strong. Revenue increased 6% for the year.

The company enjoyed positive growth across its core markets, with particularly strong growth rates in the emerging markets. Continued growth in these markets, as well as a replenished pharmaceutical pipeline, will fuel Novo Nordisk’s future growth.

Growth Prospects

A compelling growth catalyst for Novo Nordisk is the emerging markets. In 2016, revenue from China and Latin America increased 12% and 28%, respectively.

From a product perspective, Novo Nordisk is investing aggressively to roll out its next-generation insulin portfolio. This is a strategic imperative for the company, due to the increasing competition facing Victoza.

NVO Insulin

Source: 2016 Earnings Presentation, page 7

The early results are encouraging. Sales of Tresiba increased 221% in 2016, while sales of Saxenda increased 245% for the year.

Novo Nordisk sees strong growth potential for Tresiba.

NVO Tresiba

Source: 2016 Earnings Presentation, page 10

Furthermore, in January 2017, Novo Nordisk received regulatory approval of fast-acting insulin drug Fiasp in Europe.

The company hopes to replace lost sales from patent expirations with new products like these.

Separately, the company may take the opportunity to widen its portfolio. Historically, Novo Nordisk exclusively focused on diabetes and hemophilia.

However, the company could view the difficult landscape in 2017 as justification to expand its focus. This growth would likely be achieved through acquisitions in bio-pharmaceuticals, or to complement its small obesity business.

The company has stated its willingness to pursue bolt-on acquisitions in 2017.

Competitive Advantages & Recession Performance

Novo Nordisk remains highly profitable, even though growth has slowed. The company’s strong product portfolio is the result of high levels of research and development spending.

R&D expense has declined recently, but Novo Nordisk still spends heavily on R&D as a percentage of sales:

Novo Nordisk’s earnings-per-share during the Great Recession are as follows:

As you can see, Novo Nordisk performed extremely well during the recession. Not only did the company manage to grow earnings-per-share during the economic downturn, but its growth rate accelerated each year.

This growth, and resilience in arguably the worst recession since the Great Depression, is due largely to the company’s R&D and strong product portfolio.

Valuation & Expected Total Returns

Since 2000, Novo Nordisk stock held an average price-to-earnings ratio of 21. In addition, the S&P 500 Index on average has a price-to-earnings ratio of 26.

This indicates the stock is significantly undervalued, relative to its own historical average as well as the broader market index.

If the company can continue growing in this difficult climate, the stock could receive a higher valuation multiple.

Fortunately, management still expects growth at the midpoint of its 2017 forecast. Based on the revised guidance, a reasonable breakdown of long-term returns could be as follows:

Note on dividend yield:  many stock screeners have the incorrect dividend yield listed for Novo Nordisk.  The company will pay DKK 7.60 in dividends per share for fiscal 2016.  This comes to $1.064 per US share at current conversion rates for a ~3.2% dividend yield.  More details can be found at the company’s latest earnings release in the 2nd to last paragraph.

Novo Nordisk could generate future returns of 8%-10% annualized, not including returns from expansion of the price-to-earnings ratio.

Novo Nordisk is a shareholder-friendly company. A significant portion of Novo Nordisk’s returns in 2017 and beyond are due to cash returns.

NVO Returns

Source: 2016 Earnings Presentation, page 18

The company expects to return approximately $3.8 billion to investors in 2017, in dividends and share repurchases.

Final Thoughts

Novo Nordisk is entering a period of uncertainty. Investors have responded by selling the stock in the short-term. But the long-term fundamentals of the company are sound.

Novo Nordisk has a strong product portfolio, and is making progress in launching new products that should balance out any sales declines due to price deflation and generic competition.

With a 3% dividend yield, Novo Nordisk is among the higher-yielding dividend stocks. For this reason, Novo Nordisk is one of our top seven healthcare stocks for 2017.

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