August 16, 2009 in Business

Strong dollar puts drag on Novartis


A strong dollar isn’t always a good thing. Consider drug company Novartis (NYSE: NVS). It managed a solid 8 percent sales increase in local currencies recently, only to see all of that disappear when converted into U.S. dollars, its reporting currency. Sales were down 2 percent.

A major contributor was Diovan, Novartis’ blood pressure medication. It may not be as big a household name as Lipitor or Plavix, but it generated $2.9 billion in the first half of the year. Still, just like Lipitor and Plavix, it faces generic competition in the next few years.

Fortunately, Novartis seems to have a solution for the lost revenue: new drugs. Recently launched products, such as its new cancer drug, Afinitor, contributed 16 percent of pharmaceutical revenue recently, up from 10 percent last year.

New growth may also come via follow-on biologics from its generic Sandoz division. While making generic versions of biotech drugs will have a lot of competition from companies such as Teva Pharmaceutical and Merck, Novartis has established itself as a leader in making these drugs and should be at the front of the line when the U.S. opens its doors.

As long as it can keep growing sales, Novartis looks rather inexpensive, with its relatively low P/E ratio and high dividend yield.

Ask the Fool

Q: What does it mean if a company’s annual dividend is more than its earnings per share? – A.S., Charlotte, N.C.

A: It’s a red flag. Imagine that Wanton Punctuation (ticker: ?#$@!) has paid out $2 per share in dividends in the past year, but reported earnings (also known as net income) of just $1.50 per share over that period. A glance at the company’s balance sheet might reveal sufficient cash to cover the payments. Still, no company would want to keep generating less cash than it’s paying out in dividends. That’s unsustainable, and there are other demands for the cash, such as fueling growth or paying down debt.

With any luck, Wanton is simply experiencing temporary underperformance. If its troubles are deeper, then it’s likely to consider reducing or eliminating its dividend.

Also, keep in mind that reported earnings are not the same as actual cash generated. Due to various (legal) accounting practices, the earnings number can be manipulated quite significantly. You often get a better picture of how much cash a company is generating by studying its statement of cash flows.

Q: What’s hyperinflation? – F.E., Vero Beach, Fla.

A: America is used to conventional inflation, where prices tend to rise by around 2 to 4 percent per year. Some countries have experienced hyperinflation, though, where prices may rise 50 percent or more – per month!

Zimbabwe, for example, has recently experienced the chaos of hyperinflation, with prices doubling in the time it might take you to read this newspaper page. You might buy a loaf of bread with a bill that sports 12 zeros on it. A month later, you’d need to add several more zeros. Yikes.

My dumbest investment

When I first started investing, I bought 200 shares of Exide Technologies at $15 apiece because my brother and I happened to watch the end of a NASCAR race in which the sponsor of the winner was Exide batteries. I really didn’t follow NASCAR, but the guy drove a Ford (which is where I worked) and had a battery that I knew was good. Anyway, I had owned it less than three days when Robert Lutz was named chairman and CEO and the price shot up to around $30 per share. I sold, having doubled my money in less than a week. I came out smelling like a rose, but that was still my dumbest investment. That was the first (and last) stock I ever bought without researching it first. – E.M., online

The Fool responds: You’re smart to call it dumb, because it was dumb (good) luck. Remember that a great investment involves not only buying a great company, but also buying at a compelling price. Fortunately, these days you can find a lot of great companies selling at great prices.

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