Novo Nordisk: a goose that lays the golden eggs?

Novo Nordisk[1] is a pharmaceutical company that is a world leader in the treatment of diabetes. Indeed, the company has the broadest portfolio of treatments in the industry, including innovative products for insulin and other forms of diabetes treatment. In addition, the company is a leader in other areas such as growth/hormone replacement therapies and hemophilia. The company's activities consist of the discovery, development, manufacturing and marketing of pharmaceutical products. Novo Nordisk was created in 1923 by the merger of two small Danish companies with the ambition of starting the production of a revolutionary drug, insulin, which had just been discovered by two Canadian scientists.

The company is headquartered in Denmark. The company has over 37,000 employees in 76 countries, with products sold in 180 countries. Although Novo Nordisk produces a variety of drug therapies, revenues are heavily dependent on the sale of diabetes treatments. It is also worth noting that the market capitalization is 96.74 billion Danish kroner (DKK) – making it a large cap - and that the security can be purchased on the Copenhagen Stock Exchange or on the NYSE market (in the form of a American Depository Receipt ADR, symbol NVO).

Revenue and profitability

The return on equity (ROE) is very high: 66.55%; in comparison, the industry average (according to MSN Money) is 30.99%. Moreover, the ROE has been increasing progressively since 2003 as illustrated in Figure 1.

Figure 1. Evolution of the return on equity (based on data from  www.money.msn.com).

Novo Nordisk's revenues have been growing since 2003, roughly quadrupling over the past ten years (Figure 2).

Figure 2. Evolution of income (based on data from  www.money.msn.com).

In addition to revenue growth, Novo Nordisk's balance sheet appears to be virtually debt-free (<2%). This reflects the company's ability to generate profits and pay dividends based on its revenues alone.

Dividends

NVO has been paying a dividend since 1997, with a single payment per year (see Figure 3). As of December 27, 2013, the yield is 1.3%. The company states that it strives to pay a dividend that reflects long-term performance while targeting a payout ratio comparable to the industry average. This ratio currently stands at 39%. The compound growth rate of the dividend is 19.55%, which is extremely high.

Figure 3. Dividend evolution (gross) based on data from Novo Nordisk investor relations page (http://www.novonordisk.com/investors).

Share buyback

In addition to an attractive income profile and a growing dividend, Novo Nordisk also strives to buy back its own shares. Between 1998 and 2012, 26% of its shares were bought back using profits (see Figure 4). Share buybacks have an impact on dividend payments: the fewer shares outstanding, the less the company has to pay for the dividend (and the more the company might be able to increase it).

Figure 4. Evolution of the number of titles from 1997 to 2012 (based on data from the Novo Nordisk investor relations page).

Valuation of the action

The stock currently has a price-to-earnings (PE) ratio of 21.69. Compared to the highest (23.07) and lowest (4.91) PE over 5 years, we can conclude that the stock is fairly valued. According to Morningstar's analysis (www.morningstar.com), the stock would even be undervalued (4 stars). The stock price (in USD) is shown in Figure 5. This price has evolved in parallel with the growth in revenues. The beta index is 0.76, which indicates a slightly lower volatility than the market.

Figure 5. Stock Price (USD) from 1981 to 2013.

It should also be noted that a 5-for-1 stock split is planned for January 9 for holders of the title.

In conclusion, despite a relatively low dividend yield and a valuation in line with the company's accounts, Novo Nordisk shares seem to me to be a promising investment. If I have the necessary funds, then I will buy shares in this company in early 2014.

Jean-Louis