We began accumulating a position in a new dividend stock last week. I know, I’m still in shock myself. As global yields reach insanely low levels in 2016, and yield starved investors bid most dividend stocks to equally ridiculous prices, we sold the vast majority of our long term dividend stocks. Not all of those sales tied in with the Brexit high (or low depending on which security you are looking at), but in general it was a great time to unload. In fact, most of the stocks we sold are still selling at lower prices than those we enjoyed last year. I know that’s not the point, because most dividend investors are primarily focused on dividend income, but it is still something interesting to think about. With one rather glaring exception, we have not purchased any long term securities for a very long time. All we’ve been doing is trading around our few core positions, pulling out a few hundred dollars at a time, while waiting for better opportunities with the vast majority of our funds in cash.
That all changed last week, when we bought our first tranche of Novo Nordisk (NVO) at $34.25. The purchase put about $5k to work. We will likely purchase another equivalent slug of stock in the next couple weeks, and then wait and reassess. I could see ultimately building a $20k position in Novo Nordisk if share prices take another leg lower.
It is no secret that the healthcare industry has been a stock market laggard for quite a while, given its role as a political punching bag during the recent election cycle. Digging under the surface, there is a lot to like about Novo Nordisk. For those unfamiliar with the company, the Yahoo Finance profile is below.
“Novo Nordisk A/S, a healthcare company, engages in the discovery, development, manufacture, and marketing of pharmaceutical products worldwide. It operates in two segments, Diabetes and Obesity Care, and Biopharmaceuticals. The Diabetes and Obesity Care segment provides insulins, GLP-1 analog, and oral anti-diabetic drugs, as well as other protein related products comprising glucagon, protein related delivery systems, and needles. The Biopharmaceuticals segment offers products in the areas of haemophilia care, growth hormone therapy, and hormone replacement therapy. The company markets and distributes its products through distributors and independent agents. Novo Nordisk A/S was founded in 1925 and is headquartered in Bagsvaerd, Denmark.”
Novo Nordisk accounts for about 45% of global insulin sales, which in turn account for 80% of the company’s sales. The company is clearly a global leader in the treatment of diabetes, but I wish sales were more evenly distributed among the business lines. The company sells it medical treatments all around the globe. Over the past few years there has been sizable sales growth in emerging market economies such as Africa, China, and the Middle East. I think this very important for the company’s future sales, because obesity and diabetes are likely to become more prevalent among residents of those countries…..as those economies become more prosperous.
Valuation, and the price paid, are two of the most important aspects of any investment. Novo Nordisk’s share price has fallen sharply over the past couple years. A big reason for the decline has been concerns about the company’s future growth in the US. I personally think the decline is overdone, but it worth noting that the US market is very important to the company because 51% of sales originate here. That being said, the company has an outstanding financial position, and is still growing. As of the end of 2016, Novo Nordisk had about $3 billion dollars in cash and about $33 million dollars in debt. Most other financial trends look solid as well. The current price to earnings ratio of the stock is around 16, and the current dividend is about 3.25%. The company has been growing the dividend over the past few years, and the payout is fairly well covered at 62%. We did not invest for the dividend income, but it is certainly a nice benefit.
Instead we bought an industry leader, who continues innovate and profit. We like to look at the history of a company’s margins and return on equity metrics went deciding to invest for the long term. The best companies have durable competitive advantages that allow management to hold off competitors and maintain high profit margins for shareholders. On this front, Novo Nordisk shines as well. Margins have been growing over recent years, which has allowed management to reinvest in research & development……as well as produce healthy returns for shareholders.
Regular readers should expect to see us making another purchase of this company’s stock, in the near term. While global equity markets seem stretched on the whole, we were pleased with what we saw in this company. For a more in depth article, please see my article published on Seeking Alpha today. There are also many more graphs and charts, which can be found in Novo Nordisk’s 2016 annual report.
Where are you finding value in this market? Which sector looks the most overvalued to you right now?
Disclosure: Long NVO. This article is for informational purposes only and should not be considered a recommendation for anyone to buy, sell, or hold any securities. I am not a financial professional, and suggest you consult one to help with your investment decisions. The information provided was from Novo Nordisk’s 2016 annual report, Gurufocus and Yahoo Finance