Income investing can be a particularly effective investment strategy for those seeking to achieve financial independence. This is because, by buying high-quality businesses and sticking with the strategy for the long haul, your brokerage account can be flooded with passive income that can be used to pay bills.
When looking for excellent income investing opportunities, the Switzerland-based pharmaceutical company Novartis (NVS) moves to the top of the list. Let's examine the company's fundamentals and valuation to see why this is the case.
Novartis has a world-class product portfolio and pipeline to drive profits higher
Novartis' $209 billion market capitalization makes it the eighth-biggest drugmaker in the world. Unsurprisingly, the company's portfolio of dozens of prescription medicines contained 14 that fit in the blockbuster category in 2022 (i.e., they generated at least $1 billion in net sales).
Novartis' net sales fell 4.1% over the year-ago period to $12.7 billion in the fourth quarter. At first glance, that appears to be discouraging. But this doesn't give investors the entire picture needed to judge these results appropriately. That is because Novartis' currency-neutral net sales edged 3% higher year over year during the quarter. Due to the company's significant international sales presence and the exceptionally sturdy U.S. dollar compared to other foreign currencies, it faced a 7% foreign currency translation headwind for the quarter.
Novartis' decent currency-neutral net sales growth in the fourth quarter was driven by flat or positive sales growth from eight of its top 14 drugs. This included double-digit net sales growth from the heart failure drug Entresto and triple-digit net sales growth from the multiple sclerosis drug Kesimpta.
Novartis recorded $1.52 in non-GAAP (core) earnings per share (EPS) in the fourth quarter, which was up 8.6% over the year-ago period. Careful cost management helped the company's non-GAAP net margin increase by 190 basis points year over year to 25.6% during the quarter. That explains why core EPS growth came in at a higher rate than net sales growth for the quarter.
Novartis also seems to be set for solid core EPS growth moving forward. Because of its pipeline of 150-plus projects such as the drug iptacopan, analysts believe that the company will generate 5.7% annual core EPS growth through the next five years. For context, that is almost in line with the drug manufacturer industry average earnings growth outlook of 6.9%.
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Novartis' market-beating payout is sustainable
Income investors will certainly appreciate Novartis' 4% dividend yield, which is more than twice the S&P 500 index's 1.6% yield. And investors also don't have to lose sleep over whether the payout is sustainable.
This is because Novartis' projected forward dividend payout ratio registers at just under 50%. That gives the company the retained earnings necessary to improve its growth prospects and financial health.
A discounted valuation for a great business
Down just 1% over the last year, Novartis has greatly outperformed financial markets. And the valuation seals the deal to make the stock a convincing buy.
The drugmaker's forward price-to-earnings (P/E) ratio of 12.3 is meaningfully lower than the drug manufacturer industry average forward P/E ratio of 14.1. Even factoring in more modest growth potential versus its peers, Novartis' valuation multiple is discounted enough to make it a buy for income investors.
