TAKING STOCK: Novartis

Dear Mr. Berko:

We've owned a modestly profitable retail store for years and carefully invested our profits in a retirement plan since 1994. We're not aggressive and have followed your advice to own quality, dividend-paying stocks for many years. One of our customers, a pharmacist, told us that Novartis is a good stock because it pays a good dividend and has excellent products, and he knows one of the big shots who works in Cambridge, Mass. It's not a well-known company like Merck or Pfizer. So could you please tell us what you know about this company? We have been saving your columns since 1996 and can't find that you ever talked about Novartis. Considering the possibility of a negative economy and stock market after the presidential election, which you discussed in an earlier column, should we buy 200 shares in our retirement plan now or wait until after the elections?

CP in Wilmington, N.C.

Dear CP:

Novartis (NVS-$52) is a result of the merger of Sandoz Labs and Ciba-Geigy in 1996 -- inarguably, at that time, two of the most distinguished drug companies in the Universe, posting $14 billion in combined revenues. I began following NVS in late 2001. It was trading around $45, revenues were $21 billion, earnings were $1.93, the 51-cent dividend yielded 1.25 percent, and for every dollar of sales, NVS earned a net profit (net profit margin) of 23-cents. While I believed NVS was a classy outfit, I didn't recommend it for nine reasons. (1) Nobody asked me about the stock. (2) I didn't believe it had attractive growth potential. (3) The dividend was too low. (4) It didn't have any super blockbuster drugs and still doesn't. (5) Its R&D was unimpressive. (6) Drug issues were experiencing a low degree on entropy. (7) Its P/E ratio was over 22, which I thought was too high. (8) Few analysts covered the stock. (9) It was a Swiss pharmaceutical, but that's a story for another day. Today its generic division (Sandoz) produces over $9 billion in revenues, replacing well-known prescriptions such as Prevacid, Zocor, Cozar, Augmentin, Prilosec and Duragesic and is now NVS's second largest division. Its robust portfolio of OTC medicinals, such as Theraflu, Triaminic, Bufferin, Excedrin, Maalox, Ex-Lax, Benefiber , Lamisil, NoDoz and Desenex, occupy prominent shelf space at major drug stores and grocery chains. Its diagnostics, vaccine and animal healthcare divisions are considerable profit centers, and its R&D has gained impressive traction in the past decade. NVS also owns Chiron, one of the world's foremost biopharmaceutical companies, and Alcon, a major participant in the eye care market. NVS has a diversified and growing portfolio of excellent products, none of which account for an over- large percentage of revenues.

In the past decade, revenues tripled to $60 billion, but the shares haven't appreciated much from the mid $40s. However, in that time frame, while net profit margins fell 25 percent, earnings doubled to $4.10, and the dividend grew from 51-cents to $2.48, yielding a sweet 4.5 percent. And NVS has raised this dividend every year since 1996, certainly a compelling reason to own the stock.

This is a high quality, ineffably boring company based in Basel, an enchanting city occupying both banks of the River Rhine. Today I'm comfortable owning NVS, even in a difficult market, because it has a low forward P/E ratio of 13, because of its compelling revenue and earnings potential and because its net profit margins are improving and its growing dividend provides price stability in rough seas. Earnings for the coming few years are expected to grow 10 percent annually, the dividend may be raised to $2.60 next year and new product development should strengthen an already excellent portfolio. Its financial strength is a rare A++ (what would you expect from the Swiss), and with 2.4 billion outstanding shares, NVS has a market cap of $135 billion. While I like the stock, I wouldn't rush to buy it at $52. Its 12-month trading range is between $65 and $52, and you may have an opportunity to own NVS at a lower price. So place an Open (GTC-DNR) order to buy 100 at $48. And place the same order to buy the second hundred at $45.

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Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Mon, Jun 4, 2012

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