Novo Nordisk (NASDAQ:AMD) is an interesting dividend stock now showing its strengths: a strong dividend, pricing, a defensive business model, and solid earnings. All this even led to a record high recently. In euros, the share rose to 123.60 euros.
I have pointed out the valuation risk many times. The Novo Nordisk share is a large cap and no longer a dynamic growth share. Despite clear double-digit growth rates, even investors with a long-term orientation should consider how much good the current valuation has to go to justify this.
Do you want a starting point? Even current earnings growth, which isn’t exactly low, would only result in a price/earnings ratio of 23 in five years. It would be much more moderate compared to today. But many things had to run optimally for that to happen.
Novo Nordisk: Let’s think ahead about earnings growth!
Let’s start with an inventory. Novo Nordisk is currently priced at DKK 921.70. The earnings per share in 2021, which is formally the latest annual result, was 20.79 Danish kroner.
So let’s continue the calculations: Most recently, the pharmaceutical company experienced average earnings per share growth of 14%. If the management can maintain this growth trajectory, the earnings per share grow to 40.02 Danish kroner in five years. Based on the current share price, we got a price to earnings multiple of 23 in five years. At least it would be more moderate.
Although the dividend per share grew as much during this period, we received around 20.02 Danish kroner. That would mean the dividend yield would grow to just 2.17%. Novo Nordisk needs strong double-digit percentage growth to return to a more normal valuation.
Don’t forget: This is not today’s rating!
Today, the Novo Nordisk share is valued differently. Based on 2021 numbers, the P/E ratio is 44.3. In addition, the dividend yield is 1.12 per cent. It shows that today we see a valuation that has priced in a lot of expectations for future growth. It can work, no doubt. In this year of crisis, the Danish pharmaceutical company has also proven that such periods can be mastered excellently. Nevertheless, the risk side for me has not been sufficiently appreciated. Minor setbacks in growth may be accompanied by a strong price reaction.
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Vincent owns shares in Novo Nordisk. The Colorful Fool recommends Novo Nordisk.