Sanofi: A Dividend Stock... And Nothing Else

| About: Sanofi (SNY)

Summary

Sanofi Q2 Earnings Results were out this morning.

The results were not great but the earnings base is diverse.

Sanofi looks to be a slow growth story.

The 4% Dividend and 2% Buyback Yields may be enough.

Intro

Sanofi (NYSE:SNY) released Q2 2016 Earnings results this morning. The stock is down by over 2%. Results were mixed and there are a couple of moving parts to consider for those considering an investment in this 100B EUR health company.

Dividend History

Sanofi is a highly diversified health conglomerate. Earnings are stable and have supported a growing dividends for 22 years. The yield this morning stands at 3.9%. Those looking for solid dividend income could do far worse than invest in Sanofi.

Dividends are paid once per year in May. French Dividend Withholding Tax applies at 30% by default or at 15% with a tax treaty. A tax treaty also usually means you can credit the amount withheld by the French government against your income tax return in your home country. I am not a professional tax advisor so please seek advice if required.

Sanofi Sales Forecast by Franchise

Before getting into the analysis of sales it is worth noting some important adjustments:

  1. The reclassification of Vaccine Sales
  2. The financial impact of Boehringer Ingelheim deal

Reclassification of Vaccine Sales

In 2015 Sanofi reported Vaccine Sales of 4.7B EUR. For H1 2016, Sanofi reported Vaccine Sales of 1.42B EUR or 2.84B EUR annualized. Sanofi has now removed its Vaccine Logistics and Distribution business from Vaccines Sales. The move appears to be very material causing a 40% decline in Vaccine Sales. The annoying thing is that Sanofi backdated the reclassification in their earnings release so it is difficult to see the difference unless you are looking at older earnings releases. This makes me wonder has the Vaccine Logistical business suffered a massive setback since it was also distributing vaccines for 3rd parties. As such my forecast will not include this "missing" revenue. To be honest, I am not quite sure where it has gone to.

Boehringer Ingelheim deal

In June, Sanofi agreed to exchange its Animal Health franchise for the Consumer Health business of Boehringer Ingelheim. In addition, Sanofi will also receive 4.7B EUR in Cash as part of the exchange. As such, my forecast will adjust for this deal which is likely to go ahead.

Other assumptions:

  • 2016 Sales will be forecasted by annualizing H1 2016
  • Sales forecasts to 2020 will use the latest Q2-Q2 growth rates
  • Free Cashflow will be forecast to convert at 17% of Sales. The historic FCF margin is about 20% over 10 years but has recently declined to 17.5%.
EUR Millions
Franchise 2016 Growth Rates 2017 2018 2019 2020
Established 10,416 -10% 9,326 8,351 7,477 6,695
Diabetes 7,588 -2% 7,436 7,288 7,142 6,999
Vaccines 2,844 6% 3,015 3,196 3,387 3,590
Consumer 4,820 -4% 4,627 4,442 4,264 4,094
Specialty 5,728 20% 6,874 8,248 9,898 11,878
Animal 9%
Generics 1,866 -2% 1,829 1,792 1,756 1,721
Total 33,262 33,107 33,316 33,925 34,977
FCF @ 17% 5,654 5,628 5,663 5,767 5,946
Click to enlarge

Discounted Cashflow Valuation

Using the above forecast I now present the following DCF model. Over the long term it uses a 2% growth rate on FCFs, a 8% hurdle rate and a 6% Cost of Capital (being the hurdle rate less the growth rate). I think this reflects the reality that this a slow growth but steady business.

Year FCFs Disc FCFs
2016 5,655 5,236
2017 5,628 4,825
2018 5,664 4,496
2019 5,767 4,239
2020 5,946 4,047
Terminal 101,083 68,795
91,638
Net Debt* 6,300
FV 85,338
Mkt Cap 97,150
88%
Current 74.50
Fair Value 65.44
10% Safety Margin 58.90
20% Safety Margin 52.35
Click to enlarge

* 11B EUR at June 30th less 4.7B EUR from Boehringer Ingelheim deal

Conclusion

Sanofi seems overvalued to the tune of about 12%.

You can credibly argue against my growth rates. I don't think the Consumer Healthcare will decline at -4% per year or that the Specialty franchise can continue with +20% per year growth, but until I see evidence to the contrary I will stick with these growth rates for now. The overall growth rates for Sales and FCF are about 1% to 2020 which I think is reasonable.

In addition there are many moving parts to the Sanofi story. Sanofi has stated that it is looking to dispose of its Generics franchise and is currently in talks to acquire Medivation (NASDAQ:MDVN).

The Diabetes franchise is very dependent on the Lantus product which is now off patent. So one must hope that new product launches and the pipeline can fend off fierce competition from Novo Nordisk and of the big US players in the Diabetes space.

And let's not forget that Sanofi owns over 20% of Regeneron (NASDAQ:REGN). I have not considered this in my DCF value.

The diversity of the business, the high yield, its dividend growth history are also good reasons to pay a premium over the DCF price. Furthermore Sanofi has a strong buyback program. The Sanofi buyback yield is about 2% and typically runs at half the dividend payment amount. So shareholder returns are about 6%. The ROIC is not so great however running at about 6%-8% in recent years.

I am an owner of Sanofi shares at an average price of 68 EUR per share. I am happy enough to collect the 4.3% YoC and see how the story develops, but I will keep my options open. A big price surge to over 80EUR may prove a good opportunity to sell.

Disclosure: I am/we are long SNY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.