- By Timothy J. McIntosh

Novartis' (NVS) dividend has been increased by 1%. Its overall yield is 3.80%. The firm started paying a dividend in 1993.

Novartis is a large pharmaceutical firm based in Switzerland. Its shares trade on the New York Stock Exchange (NYSE) as an American Depositary Receipt (ADR). The company was created by the merger of Sandoz AG and Ciba-Geigy AG in December 1996. It is primarily a pharmaceutical company but also a major producer of generic drugs through its Sandoz division. It offers eye care products through its Alcon division and also sells consumer and animal health products. Pharmaceutical products account for 55% of sales, generics for 16% and eye care for 19%. The company was founded in 1895 and is headquartered in Basel, Switzerland.

• Warning! GuruFocus has detected 4 Warning Signs with NVS. Click here to check it out.

• NVS 15-Year Financial Data

• The intrinsic value of NVS

• Peter Lynch Chart of NVS

Novartis has maintained a solid three-year dividend growth rate of 4%. Novartis currently ranks fifth in yield within the large cap health care, major drug manufacturer category. The annual dividend for the March payment will be $2.75 versus the prior year rate of $2.72 per share. Novartis AG.is a member of our Top 100 Dividend Stock List (see below).

The dividend will be paid at the new higher rate on March 3 to shareholders of record at close of business on March 1. Novartis is currently priced at $73.34. Listed in the table below are the annual dividend payments since 2010.

Quantitative analysis

We examine Novartis on our five key criteria, which include;

Additional quantitative information on price-sales (P/S) ratio and historical yield;

Positives

• Novartis maintains an investment grade credit rating.

• Novartis has maintained a three-year growth rate of dividends of 4%.

• Novartis' dividend yield is above that of the Standard & Poor's 500 Index.

• Novartis maintains a beta of 0.90, lower than the average company.

• Novartis' current dividend yield (3.80%) is above its five-year average of 3.66%.

Negative

• Novartis is trading slightly above its 10-year average P/S ratio.

Latest earnings and overall analysis

Novartis issued its earnings data on Jan. 25. The company reported $1.12 earnings per share for the quarter, topping the consensus estimate of $1.09 by 3 cents. Revenues declined 2% to $12.3 billion and were marginally below the analyst estimates. Novartis' three segments had mixed results. The pharmaceutical division, or Innovative Medicines, maintained revenue of $8.3 billion, down 1% year over year. Pricing pressure along with competition from generics had an impact.

Its key drug Gleevac was notably affected. Gleevac sales dropped 29% to $3.32 billion last year. Its newer drugs did very well. Gilenya's revenue was up 12% to $3.11 billion. Cosentyx, launched in February 2015, also became a blockbuster medicine with sales exceeding $1 billion for the first time. Entresto, another key element to Novartis' future, generated revenue of $170 million in 2016.

Sales at the Alcon division were $1.4 billion, flat year over year. Alcon has been a thorn for Novartis for several years. Cataract and refractive sales were pressured by competitors. Novartis announced on its conference call that the firm is considering alternatives including a spinoff or an initial public offering. The company anticipates to provide more information on their internal review by year-end 2017. The business could bring in $25 billion to $35 billion if sold. The Sandoz division sales for generic drugs were $2.6 billion, up a better-than-expected 3% as volume growth was solid. Generic biopharmaceuticals sales surged nearly 30% year over year to $277 million.

For the full year, total revenue for Novartis was $48.5 billion, flat from 2015. Earnings per share for the full year was $4.75, down 25 cents from the previous year. This was in line with expectations as the firm transitions from its major patent losses and focuses more upon new key drugs and biosimilars. Free cash flow was very strong at $9.5 billion. The firm also initiated a share buyback of $5 billion. Management indicated they are to execute buybacks this year.

Novartis' new drugs and pipeline progress has been encouraging. Cosentyx continues to have accelerating growth. The company received European Union (EU) approval for a label expansion of ophthalmology drug Lucentis. The drug is now approved to treat patients with visual impairment due to rare conditions causing choroidal neovascularization (CNV). The European Commission (EC) also approved Arzerra in combination with fludarabine and cyclophosphamide for the treatment of adult patients with relapsed chronic lymphocytic leukemia. Novartis got positive review from the Committee for Medicinal Products for Human Use (CHMP) for Votubia as an adjunctive treatment for patients aged 2 years and older whose refractory partial-onset seizures, with or without secondary generalization, are associated with tuberous sclerosis complex (TSC).

Quite a few drugs/candidates received priority review status from the Food and Drug Administration (FDA) during 2015-2016. The FDA granted priority review to LEE011 (ribociclib) in combination with letrozole as first-line treatment for postmenopausal women with HR+/HER2 - advanced or metastatic breast cancer. The application for the same was also accepted for review in the EU. The FDA also granted priority review to Tafinlar + Mekinist combination therapy for the treatment of BRAF mutant nonsmall cell lung cancer (NSCLC) and PKC412 (midostaurin) for the treatment of newly diagnosed FLT3 mutation-positive acute myeloid leukemia and advanced systemic mastocytosis.

Novartis maintains a solid return on equity of 9%. At a price of $73.34, Novartis stock currently trades at a P/S ratio 3.42. This is slightly above the long-term average due primarily to the revenue decline after the loss of top drugs Diovan and Gleevac. It does trade at a forward price/earnings (P/E) ratio of 14, below that of the market. I feel the bad news in Novartis is clearly reflected in the price of the shares. Novartis traded at $106.80 in 2015. Thus the shares have fallen 30% in just over a year. This is a substantial price reduction for a large blue-chip pharmaceutical firm with a long history of producing stable earnings and dividends.

Based on the firm's higher-than-average dividend yield, investment grade rating and low beta, Novartis remains a top-ranked firm within the pharma sector. It thus continues to qualify as a member of our Top 100 Dividend Stocks list.

Disclosure: I am long Novartis.

Start a free seven-day trial of Premium Membership to GuruFocus.

This article first appeared on GuruFocus.

• Warning! GuruFocus has detected 4 Warning Signs with NVS. Click here to check it out.

• NVS 15-Year Financial Data

• The intrinsic value of NVS

• Peter Lynch Chart of NVS