Dividend Investing: Sanofi-Aventis (SNY)

Investing in stocks that pay high dividends is an effective way for the conservative investor whose concern is mainly with the preservation of capital. When investing for a high dividend yield, the most important consideration for the investor is the sustainability of such dividends. Hence research into the underlying dividend payer is crucial.

I should make it clear that I’m not recommending any of the stocks I write about. Any investor who is contemplating investing for a high dividend should use these articles a base from which to do further research and in depth analysis.

The largest drug companies as a group currently sit with large amounts of cash and recurring cash flow streams, which over the past few years have resulted in high dividends to stockholders.

One such company is Sanofi-Aventis (SNY), a French based pharma giant with a market capitalization of just under $100 billion. The company is the the world's fourth-largest pharmaceutical firm by prescription sales. Sanofi-Aventis engages in the research and development, manufacturing and marketing of pharmaceutical products for sale principally in the prescription market, but the firm also develops over-the-counter medication. Sanofi-Aventis covers 7 major therapeutic areas: cardiovascular, central nervous system, diabetes, internal medicine, oncology, thrombosis and vaccines (it is the world's largest producer vaccines). The company’s biggest selling drug is Lovenox, and it also produces Ambien which hopefully you won’t require while reading this article.

At a price of $36.50 the company is sitting on a dividend yield of 4.43% (it paid out $1.63 per share in 2009). The company is cash flush with almost $7 billion in cash on the balance sheet which represents about 20% of current assets. Over the past five years, the company has generated on average about $10 billion in cash from operations. Total dividends paid over the same period average to around $3.1 billion per year, so one can see how this cash cow’s dividend from a historical perspective has been strong.

However dividend investors are concerned with the future viability and sustainability of dividends. Pharmaceutical companies are going to come under pressure when patents on many of their leading drugs expire, opening them up to competition from generic manufacturers which naturally erode margins and lower profits and cash flows. Sanofi is not excluded from this problem.

In saying that, given the large annuity revenue streams these firms have built and the tremendous amounts of cash they throw off, the Sanofi model still present significant barriers to entry from competition. Research shows that the dividend is likely to remain at current yields for the considerable future. While pharma giants are not replacing revenue through new products and research as quickly as it is being eroded through generic competition, the deal between Pfizer (PFE) and Wyeth shows just how easy it is to pick up an entirely new drug pipeline when you’re sitting on copious amounts of cash.

Sanofi is likely to be able to generate more than sufficient cash flow to produce strong dividends to shareholders, and thus the yield is probably relatively secure for the income-seeking investor.

Sanofi trades on a PE ratio of 13.65 times and a price to book of 1.5 times, both of which are conservative by industry standards. Debt is also much lower than peers and return on equity is much higher, albeit at only 11%.

All in all Sanofi is probably the best pharmaceutical stock to buy in the case of the dividend-seeking investor.

Other dividend paying stock articles: CenturyTel (CTL) here, Duke Energy (DUK) here, Mercury General (MCY) here, TC Pipelines (TCLP) here, ALLETE (ALE) here, ENI SpA (SNY) here.

Disclosure: None