# Novartis



## Banalanal (Mar 28, 2011)

Novartis:

-Global reaching company with good prospects on increased expansion.
-High margins, good ROE, low debt, good CROIC
-Ten year averaged FCF growth of 12%.
-Great dividend and growth history, good payout ratio
-Analysts of the pharma industry give NVS a leading position in the number of up and coming drugs via their pipleline.
-They have a profitable generic department to offset patent losses and decrease volatility.
-NVS is in a European climate beaten down by threats of recession,though generates significant profits outside of Europe and is based in Switzerland, and thus its company valuation may be unduly punished. 

If we take their 11.5% fcf growth, reduce it to 8% for the next 10 years, and 5% per year for the 10 years after that, ask for a 15% return on our investment, we get a purchase price of 82.22$. (Reducing their fcf growth may be unfair but gives us a higher margin of safety.) I have NVS at current prices offering us a 33% MOS.

I love the fundamentals of the company. I like the prospects for their future as more and more people worldwide are able to afford better healthcare. I think patents on current drugs and patents on a robust pipeline, coupled with their high budget for R&D, and volatility reduced revenue from their generic department offer a moat in the industry.

What don't you like, why wouldn't you buy assuming my figures and research are correct?

Thanks.


----------



## PMREdmonton (Apr 6, 2009)

The big problem with Novartis is that you lose 35% of dividends from withholding taxes if you buy through an American ADR (about the highest rate in the world).

If you are expecting a large chunk of gains to come from dividends you should probably consider holding in a non-registered account so you can at least claim a credit for those withholding taxes.


----------



## Spidey (May 11, 2009)

PMREdmonton said:


> The big problem with Novartis is that you lose 35% of dividends from withholding taxes if you buy through an American ADR (about the highest rate in the world).
> 
> If you are expecting a large chunk of gains to come from dividends you should probably consider holding in a non-registered account so you can at least claim a credit for those withholding taxes.


I sold this stock for exactly this reason. Americans are exempt but Canadians are not. Apparently there's a way to get some of the withheld tax back by sending a letter to some US entity. Way too much hassle.


----------



## Banalanal (Mar 28, 2011)

That's a fair point. I need to know the tax regulations better. After the 35% WT is taken off, is it taxed again from domestic dividend taxes? Or 35% total?

1.What is the rate for a CDN company held by a CDN?
2.What is the rate for a U.S. co held by a CDN (withholding tax plus domestic tax)?
3.What are capital gains taxes? (Any difference between nationality on domestic vs foreign co's held by CDNs?

Also, the very conservative DCF analysis doesn't need the dividends to account for the future value of the company as dividends are paid out before the FCF totals as I understand it. So if you aren't buying specifically for a yearly income stock but buying for a long term return, I believe the analysis still stands? Plus the dividend amount after the 35%tax is still around 2.5% yield currently.

Thanks


----------



## gibor365 (Apr 1, 2011)

I was considering buying some of NVO, NVS, TEVA or AZN last year, but stopped watching them because of the huge witholding taxes, imho better to stick to ABT, BMY or JNJ


----------



## Banalanal (Mar 28, 2011)

I think for those who would suggest buying a US company over a non US foreign company have to provide a breakdown in expected performance based on past data of the two companies. 

I believe I have shown NVS to be priced at a large margin of safety with conservative expectations and if the 35% withholding tax reduces the dividend to 2.5%, the analysis hasn't been affected.


----------



## gibor365 (Apr 1, 2011)

Banalanal said:


> I think for those who would suggest buying a US company over a non US foreign company have to provide a breakdown in expected performance based on past data of the two companies.
> 
> I believe I have shown NVS to be priced at a large margin of safety with conservative expectations and if the 35% withholding tax reduces the dividend to 2.5%, the analysis hasn't been affected.


You ask "What don't you like, why wouldn't you buy assuming my figures and research are correct?"

So, I wouldn't buy (right now) because of ridiculous withholding taxes? and if I get just 2.5% why I wouldn't prefer ABT? (I hold a big chung of ABT in my portfolio)


----------



## Banalanal (Mar 28, 2011)

Fair enough. Anybody else?


----------



## SW20 MR2 (Dec 18, 2010)

Can you please explain this a little more about buying thru an American ADR? How does holding NVS differ than buying something like ABT?



PMREdmonton said:


> The big problem with Novartis is that you lose 35% of dividends from withholding taxes if you buy through an American ADR (about the highest rate in the world).


----------



## gibor365 (Apr 1, 2011)

SW20 MR2 said:


> Can you please explain this a little more about buying thru an American ADR? How does holding NVS differ than buying something like ABT?


If you buy ABT in your registered account, you pay no witholding taxes, if you buy NVS you will pay 35% (% depends on country where stock is listed)..


----------



## Toronto.gal (Jan 8, 2010)

Just to name a few: currency/political risks/tax agreements & withholding taxes, which can vary significantly from country to country. 

More information here: 
http://www.investopedia.com/university/adr/adr1.asp#axzz1kJPXaSnh

[Tax rates may not be current].
http://www.ritceyteam.com/pdf/withholding_tax.pdf


----------



## SW20 MR2 (Dec 18, 2010)

So if I'm understanding this correctly...Since NVS is a foreign company, I'm subject to the witholding tax for the company's country, regardless of whether it's held in a registered or non-registered account. Since ABT is a U.S. company, I'm subject to the witholding tax in a non-registered account but not subjected to the tax on a registered account. 

Is that correct?


----------



## Banalanal (Mar 28, 2011)

Anybody else with reasons why they would not buy NVS?


----------



## gibor365 (Apr 1, 2011)

SW20 MR2 said:


> So if I'm understanding this correctly...Since NVS is a foreign company, I'm subject to the witholding tax for the company's country, regardless of whether it's held in a registered or non-registered account. Since ABT is a U.S. company, I'm subject to the witholding tax in a non-registered account but not subjected to the tax on a registered account.
> 
> Is that correct?


You got it.


----------



## gibor365 (Apr 1, 2011)

Banalanal said:


> Anybody else with reasons why they would not buy NVS?


Think also about patent expiration:

The company also faces the loss of patents on its second-best seller, the cancer medicine Gleevec, starting in 2014. That puts an additional $4.27 billion in annual sales at risk

http://www.businessweek.com/magazine/how-novartis-plans-to-avoid-the-patent-cliff-08042011.html


----------



## Banalanal (Mar 28, 2011)

I actually liked hearing in that article how NVS increased R&D spending by 21% while competitors Sanofi and Pfizer have made cuts. Great thing for NVS.

It's tough to evaluate pharma co's and patent loss and that is what is holding me back. I have to believe the market is roughly taking into account the patent expirations on the two big drugs, one in 2012 and one in 2014. But NVS is aggressively marketing to great parts of the world, developing regions to buoy sales. 

Apparently Canada has tax treaties with several countries to reduce double taxation and if that doesn't apply you can apply for a tax credit. It would be nice to find the rules and regulations and an explicit list of international investing and tax implications for Canadians.


----------



## bpither (Apr 27, 2009)

No withholding taxes on British stocks such as AZN and RDS.B


----------



## Banalanal (Mar 28, 2011)

That's interesting.


----------



## SW20 MR2 (Dec 18, 2010)

Is there an easy way to tell the difference between ADR and non-ADR stocks?


----------



## humble_pie (Jun 7, 2009)

big wallop after earning came out a few hours ago although not all news services carrying this for some reason.

re withholding on dividend - host country is switzerland therefore there's no tax convention with other countries & the full swiss non-resident tax rate applies - 35%.

re what's an adr, what's not an adr - investor should know in which country the head office of his potential investment is located. If he doesn't know he should not be buying the stock. Put another way, foreign stocks trade in US as adrs, adss, rare kind of new york notes, etc.


----------



## Banalanal (Mar 28, 2011)

Do you have a list of what the tax rate is by country when we buy foreign stocks?


----------



## humble_pie (Jun 7, 2009)

would not be a list lol, would be more like a 3-dimensional web.

all countries have different withholding tax rates for most other countries. Everything depends upon the particular tax convention between country A & country B.

tax haven jurisdictions by definition don't sign tax conventions w other countries so they are fairly easy to figure out. But even they have exceptions.


----------

