Novo-Nordisk makes the FlexPen, a pre-filled insulin delivery device that eliminates the step of loading insulin into the delivery system.
Who? David Driscoll, partner, Toron Capital Markets Inc.
My best investment Novo-Nordisk NV
The background We like to have about 60 per cent of our equity investments in inelastic businesses, such as consumer, health care, financial and utilities. Inelastic businesses make money whether the economy is strong or weak - people still have to buy their toothpaste, pay their gas bill, go to the bank or buy their drugs.
Two things we consider when creating portfolios:
First, roughly 60 per cent is blue-chip stocks. They're the anchors to the portfolio, where the dividends grow annually and, ultimately, the yields and income should rise, too.
Second, we're interested in companies that generate consistent free cash flow - money that's left over after all the bills are paid. Companies can raise dividends, pay down debt, buy back shares, make acquisitions to gain market share or upgrade their plants and equipment.
Novo-Nordisk NV came onto our radar screen back in 1997 because it generated consistent free cash flow. It had a good track record of growing the business and reinventing itself along the way, and in November, 1997, we decided to buy.
This is why we liked it then, and why we continue to like it:
- It's the leading provider of insulin in the world. The number of cases of Type 2 diabetes is expected to soar, notably in India and China. Novo is the leading provider of insulin in those countries.
- Its research and development expenses as a percentage of sales have consistently been among the top five pharmaceuticals in the world. By consistently developing new products, it "keeps the wolves [generic producers]from the door."
- Novo has successfully built a strong product pipeline with excellent patent protection.
- It is a long-standing member of the Dow Jones sustainability index - consistently economically, socially and environmentally responsible at levels greater than its peer group.
- It has a solid track record of dividend growth.
The payoff Our first purchase was at $10.38 (U.S.) and on June 24, 2010, the stock closed at $83.53. We have bought the stock regularly since our first purchase. It has suffered four major price dips along the way, but that just provided us the opportunity to buy more.
We have, however, rebalanced the stock to a neutral weight along the way when its share price has outperformed other stocks in the portfolio.
The sweetener in addition to the stock performance has been the dividend. The first purchase yield-at-cost was 0.7 per cent, as the dividend was 7 cents a share. Today, the $1.38 dividend - up 20-fold in 13 years - at the original $10.38 results in a yield-at-cost of 13.3 per cent. (The average yield for our clients is 4.5 per cent because of subsequent purchases.) The current yield at market is 1.6 per cent.
Dividends are as important as a stock's share price and should never be overlooked. Two-thirds of all equity performance in the long run comes from rising dividends and the reinvestment of dividends, not from share price appreciation.
The takeaway We are value investors who invest in companies with an expectation to get paid a piece of the profits along the way from the free cash flows. As dividends rise over time, the share price should ultimately follow.
It's important to invest in the company and not trade stock prices. If you have a good quality company, and the market's falling because of macroeconomic conditions, not because of business risk, then [you should] feel comfortable, because they pay the dividend, to continue to buy more.
You don't have to trade actively to make money.
This may be contrary to other investment styles where the holding periods are much shorter - the average turnover of Canadian equity funds in 2009 was 120 per cent, meaning every stock in those portfolios was bought and sold by October of that year. This means that the nickels and dimes accrued to the portfolio manager and the broker, not to the unitholder.
The moral of the story is this: If you find a company that is a leader in its industry and performs as expected, there's no reason to sell it just for the sake of trading. We continue to hold Novo-Nordisk in our portfolios and plan to buy more when the price is right.
(All information includes two stock splits - five-for-two on April 10, 2001, and two-for-one on Dec. 14, 2007.)