Can Novartis Move to New Highs and Sustain Them?

Key Points

• Novartis stock had a smash quarter and is on track to hit new highs. 
• The company's guidance is above consensus; the Q2 report includes a new repurchase authorization. 
• Analysts are holding the stock but they see it trading lower. An upswing is in play but gains may be capped.

After more than a decade of trading within a wide and volatile range, it looks like Novartis NYSE: NVS shares will move to a new high and sustain the move. 

Despite its looming patent cliff, the company exceeds expectations, and its cash flows are solid. The cash flows allow for a healthy dividend and a newly announced share repurchase program to support the market for many quarters. 

The company announced a $15 billion authorization worth more than 7.25% of the market cap and a substantial return for investors. The buybacks should complete by 2025. By then, one of the company’s 200+ pipeline products could be ready for market. 

Novartis Well-Positioned Despite Patent Cliff 

Novartis faces a potential loss of $9 billion in annual sales by 2026 due to upcoming patent expirations, but you wouldn’t be able to tell from Q2 results. The company reported $13.62 billion in revenue for a gain of 6.6% compared to last year, which beat the consensus by 310 basis points. Solid results in four key drugs, including Entresto and Kesimpta, underpinned the growth. Innovative Medicine, the company’s core segment, grew by 7% to lead Sandoz by 200 basis points but showed substantial growth relative to last year. 

The margin news is even better, with costs coming down and leverage increasing due to sales volume. The company reported a 50% increase in operating income and a 25% increase in adjusted earnings, which is better than expected. The $1.83 adjusted earnings beat the MarketBeat consensus figure by nearly 400 basis points and led management to increase guidance. 

The full-year guidance increased to high-single-digit revenue growth from the prior forecast for mid-single-digit growth and for operating income to grow by low double digits. The segment breakdown is a little different, but both were guided higher and are looking at mid-single to low-double-digit increases in revenue and earnings. 

This news is more important than ever because the board approved a spin-off of Sandoz slated for later in the year that will unlock shareholder value. Sandoz produces generic and bio-similar drugs and should capitalize on upcoming patent expirations. 

Novartis Pays a Healthy Dividend 

Novartis pays a healthy dividend worth 3.5% to investors. The company pays out about 55% of the earnings outlook, which is relatively safe for income investors. 

A healthy balance sheet backs up the Novartis dividend payment and comes with another attraction. Novartis pays out annually, meaning investors get a lump sum of 3.5% at one time. That makes it a perfect target for dividend capture strategies that aim to collect dividend payments by holding the stock for the least amount of time. Novartis tend to declare in February, go ex-dividend in early March and pay out in late March. 

Novartis shares surged 5% following the news, confirming an upswing in the price action that began last year. The move also confirms support at critical levels and sets the market up to move higher. The next hurdle is the current high near $105, which may cap gains. If the market can’t get above that level, it will probably remain range bound between $95 and $105. If the market can move above $105 and sustain it, it should take the stock price up to $110 or higher. 

One risk to the outlook is the analysts. The analysts are holding Novartis but see it moving lower from here. The institutions offset that, but the data is mixed. Institutional activity is bearish on balance for the trailing 12-month period but bullish in 2023.