Sanofi: A Good Long-Term Dividend Play?

| About: Sanofi (SNY)

High dividend utilities and tobacco stocks are trading at historically high PE ratios. A good place to hunt for high dividend stocks with low PE ratios is the pharmaceuticals industry. We think Sanofi SA (NYSE:SNY) and some of its peers like Pfizer (NYSE:PFE) are very attractive dividend plays offering attractive earnings yields for long-term investors.

Sanofi is the second most popular healthcare stock among hedge funds. The most popular is Pfizer, which was held by 69 hedge funds at the end of last year. But the number of the hedge funds interested in Pfizer slightly fell by 7% from 74 at the end of the third quarter. On the other hand, there are an increasing number of hedge funds bullish about Sanofi. At the end of September last year, there were 49 hedge funds with Sanofi positions in their 13F portfolios. The number was increased by 27% to 62 hedge funds at the end of December. For example, Rob Citrone and Richard Chilton both bought new Sanofi stakes over the fourth quarter last year. Warren Buffett was also a large shareholder of Sanofi. His Berkshire Hathaway had nearly $150 million invested in the stock at the end of 2011 (see Warren Buffett's top stock picks).

As a company based in France, Sanofi has relatively large exposure to the European market. Sanofi's sales in Western Europe accounted for about 30% of its total sales. Therefore, the company also suffered from the European debt crisis last year. It was trading at about $40 per share at the beginning of July and its price went down to about $31 per share in September. It has recovered to $39.05 per share today but it still seems to be trading at a discount compared with its peers. Its current P/E ratio is 13.84, a discount to the industry average of 18. Analysts expect the company to make $3.87 per share in 2012 and $4.03 per share in 2013. Therefore, Sanofi's forward P/E ratio is around 10, a significant discount to the 16.90 of the average of other pharmaceutical stocks. Sanofi's Plavix patent is scheduled to expire in May this year, which partially explains the low P/E ratios it is trading at.

Sanofi has a high dividend yield of 4.5%, which is good for dividend investors. The company's earnings are expected to be relatively stable. Analysts expect its earnings to grow at about 2% per year over the next few years. The company's payout ratio is 48%, which indicates that Sanofi has the ability to maintain and even increase its dividend payouts in the future even though it fails analysts' expectation. The company recently slightly reduced its dividend from $1.8221 per share to $1.7564 per share, which will be paid to shareholders in May. Despite that, Sanofi's dividend payments demonstrated a growing trend over the past decade. Its dividend in 2003 was only $0.4897 per share.

In April 2011, Sanofi acquired Genzyme for $20 billion in cash and $3.8 billion in additional future payments contingent on milestone achievements. The acquisition was mainly financed by the issuance of new debt and the average cost of financings is expected to be below 2% before taxes. The interest payments due to the debt issuance dragged down Sanofi's margins. But the company has already paid back some of the debt. Its current debt-to-equity ratio is only 0.27, below the industry average. So we expect its interest expense will be much lower this year. Moreover, as a well-known biotechnology company specialized in treating rare diseases, Genzyme generated about $4 billion sales in 2010. We expect the acquisition will be the main driver of Sanofi's revenue growth in the year ahead. We also believe the acquisition will increase Sanofi's exposure to the profitable U.S. market as well as its exposure to the fast-growing biotechnology industry.

Sanofi's main competitors include Merck (NYSE:MRK) and Pfizer. Similar to Sanofi, these two companies also have high dividend payouts. Both stocks have a dividend yield of above 4%.

Additionally, both companies also faced patent expirations for their products. In 2008, Merck lost a $3 billion patent protection for its osteoporosis drug Fosamax. Its patent protection on Singulair, which generated about $5.5 billion sales in 2011, is also going to expire this year. Pfizer also lost its U.S. patent protection on Lipitor, whose sales were $9.6 billion last year. As a result, these two stocks are also trading at discounts. Merck's forward P/E ratio is about 10 and Pfizer's is about 9.7. In 2013, Pfizer is expected to make $2.36 per share and Merck is expected to earn $3.75 per share. Therefore, Merck's P/E ratio for 2013 is 10 and Pfizer's is 9.3, versus 9.7 for Sanofi. Over the longer terms, Merck and Pfizer's earnings are expected to grow at 3-4% annually, versus 2% for Sanofi.

We like all three stocks but we like Pfizer most (check out our previous article about Pfizer). We think these stocks are ideal for retirees as they have attractive earnings yields and pay out a certain part of their earnings as dividends to investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.