Should Income Investors Buy This Blue Chip Stock?

For a dividend investor, generating enough income to become and stay financially independent (higher passive income than expenses) comes down in large part to the longevity of the businesses in an investment portfolio. Here’s what I mean: When you invest your money in a business, you want to be reasonably confident it will be around a good long while. After all, a company can’t pay dividends if its business crumbles.

With a corporate history dating back to the 18th century, few businesses are as capable of paying dividends for many more decades as the Swiss pharmaceutical giant Novartis (NVS -0.11%). But is the stock currently a buy for dividend investors today? Let’s drill down into Novartis’ fundamentals and valuation to settle this question.

Consistently delivering results to shareholders

Novartis routinely ranks among the 10 largest drugmakers in the world. The company’s $220 billion market capitalization is supported by an unbelievably deep portfolio of medicines. Based on results from the first half of 2023, 14 of Novartis’ products will exceed $1 billion in annual net sales this year. This is led by the No. 1 heart failure brand prescribed by cardiologists, Entresto, which is poised to surpass $6 billion in net sales in 2023.

Novartis’ net sales increased by 6.6% year over year to $13.6 billion in the second quarter ended June 30. And when factoring out the unfavorable foreign currency translation that resulted from a strong U.S. dollar, constant currency net sales advanced by 9% during the quarter. These results were fueled by the fact that 11 of its top 14 medicines grew constant currency net sales for Q2. This growth varied from a low single-digit percentage for immunology medicine Cosentyx to triple-digit percentage growth for multiple sclerosis therapy Kesimpta.

Novartis’ non-GAAP (core) earnings per share (EPS) surged higher by 17.3% over the year-ago period to $1.83 in Q2. Adjusting for foreign currency headwinds that trickled down from the top line to profits, the company’s core EPS would have risen by 25% during the quarter. This tremendous growth was driven by both a 120-basis-point expansion in non-GAAP net margin to 28% and a reduced share count due to share repurchases. That explains how core EPS growth exceeded net sales growth for the quarter. 

Thanks to Novartis’ existing medicine portfolio and over 130 projects in its development pipeline, the company’s outlook is quite promising. This is why analysts believe the company’s core EPS will rise by 7.6% annually for the next five years. 

A well-covered payout

Novartis’ 3.4% dividend yield is substantially more than the S&P 500 index’s 1.5% yield. This payout appears to be safe going forward since Novartis’ dividend payout ratio for the next 12 months is projected to register just below 48%. This gives the drugmaker plenty of room to focus on growing its business through acquisitions and research and development, reduce its debt load, and complete share buybacks. That’s why I believe Novartis should have no problem continuing to pay its current dividend in the future. 

The valuation is well-deserved

Shares of Novartis have rocketed 25% higher in the past 12 months. But even after this rally, the stock still seems to be a buy for income investors. Novartis’ forward price-to-earnings (P/E) ratio of 14.2 isn’t much greater than the drug manufacturers’ industry average of 13.1. Given its world-class quality as a business, this is a premium valuation that is arguably justified.