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A Strong Dividend Yield for Undervalued Novartis

Damien Conover, CFA

Damien Conover: In looking at opportunities for dividend-yielding stocks, one stock we're highlighting is Novartis. This is a big pharmaceutical company that is focused on several different therapeutic areas, including generic drugs as well as areas within the ophthalmology space.

The reason why we like Novartis is, we think it's undervalued from a stock standpoint, but also has the potential for really strong dividend yield for quite some time. Right now it's over a 3% dividend yield. It's been raising its dividend over the last 20 years, so we think there's opportunity for further dividend increases.

When we think about the drivers of that dividend, it really comes down to how many drugs are losing exclusivity versus how many drugs are coming in to the market from the pipeline. We think about Novartis, they do have some patent losses, so that dividend growth that we've talked about in the past will probably moderate. We anticipate more of a stable to slightly growing dividend into the future. Right now the dividend payout ratio is a little but over 50%, so that's in line with its peer group. 

There are some interesting dynamics for Novartis that we think support the dividend going forward. Most notably, a couple new products. Most importantly is Cosentyx. This is a drug for immunology, and it will likely transform people's experience with psoriasis. For severe psoriasis right now, there's only limited treatment options, and Cosentyx has the opportunity to develop into a multibillion dollar drug.

Similarly, Entresto is another drug that's just launching right now that is doing incredibly well in the cardiovascular disease space, also another major blockbuster. These blockbusters should more than offset the patent losses that Novartis is facing over the next three years. We think the dividend should be stable to slightly growing over these next three years.

Beyond the dividend yield, we also see Novartis as undervalued. There's concerns right now on drug pricing pressure, and we think drug prices that are innovative, which is really where Novartis is focused, will continue to price very, very well. That strong pricing power, we think in time, will be reflected in the stock price. Not only do you get a strong dividend yield with Novartis, you also get the opportunity for capital appreciation.