Since around this summer I have started buying in a bit into Novo Nordisk. My main thesis has been that the stock is terribly undervalued and that investors will probably get nice dividend increases in the future. The number of owners has increased sharply during the share’s fall, but now in August, ownership has exploded.
Direct yield: 3.09%
Dividend growth (10-year average): 16.4%
Increase in the last 12 months: 19.9%
Number of owners Novo Nordisk, Avanza
Strange movements
This September the stock has been acting quite strangely. At first it dropped significantly but after September 10 the price has risen. No huge news apart from the staff reductions has been sent out during that period.
Many people have to pack their bags
Novo Nordisk is currently implementing major changes to streamline operations. First, it announced that 9,000 employees will lose their jobs (approximately 11% of the total workforce). This is the largest round of layoffs in Danish history. The next day, Novo announced that no employee will have the opportunity to work from home. Office/Lab work is what applies.
It is clear that management wants to cut costs and improve efficiency. Of course it is sad that people are losing their jobs. On the other hand, I think that larger companies can benefit from getting rid of staff as you sometimes pay for more than you get out of it, so to speak.
What do I mean by that? Yes, just because you cut the number of employees by 11% doesn’t necessarily mean that sales will drop by 11%.
Now it is hoped that this cut will contribute $1 billion by 2026. Money that will instead be invested in product development.
All of this is happening in the wake of the third lowered profit forecast for 2025. That a company lowers its forecast 3 times in just over six months is remarkable.
Challenges exist
The brake pad right now is, in a way, Wegovy, Novo’s leading drug against obesity. Growth is slowing as significantly cheaper GLP1 preparations from various pharmacies continue to spread, so-called unlicensed copies.
In addition, the fierce competition from Eli Lilly’s Zepbound continues. In addition, there are problems with insurance reimbursement for weight loss drugs in the US. Taking the drug is therefore a major financial issue as it is not cheap without the right help from insurance companies.
On top of everything, we are currently seeing a transition period as new CEO Mike Doustdar takes over and steers them towards a brighter future. He took office in August and has really taken a hard line from the start with regards to staff reductions.
Mike’s mission will now be to streamline the company, accelerate capacity expansion and maintain Novo’s leadership in the GLP-1 segment.
The positives of Novo Nordisk
As you can see, there are indeed challenges, but despite these, Novo Nordisk’s long-term prospects remain strong.
From a global perspective, the demand for effective weight loss drugs is in its infancy. Market penetration is fairly low and perhaps more favorable reimbursement systems could increase sales even further.
As I mentioned in an earlier article, about three-quarters of Novo’s revenue comes from treatments for diabetes and rare diseases. These parts serve as a stable base and generate very stable cash flows .
If we look at Novo Nordisk’s dividend payout ratio, it has been roughly 50% since 2015. This means that only 50% of the profit is paid out. Some years it has been 51% and other years 49%, but never above 52%. We are toying with the idea that the company would not raise its dividend in the next 12 months. In that case, the dividend payout ratio would fall to 45%.
All else being equal, we should be able to see dividend increases going forward. Novo’s 30-year streak of annual dividend growth is therefore not threatened if you ask me. Then I have also woven in the new lowered forecast from the weight loss.
Looking from a longer perspective, much of it is about Novo continuing to scale up its production, improving insurance reimbursement, and somehow succeeding with the oral treatment of obesity.
It will be exciting to see Novo’s progress in the coming years and I’m on board with that 🙂.
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