Allergan, Inc. (AGN), Novo Nordisk A/S (ADR) (NVO): Should These Drug Companies Continue to Pay a Dividend?

Editor’s Note: The article has been modified to better describe the current companies’ dividend arrangements.

Even a hardcore dividend addict such as I will admit that there are times when a company should hold off on paying a dividend. The following is an examination of a few companies in the drug manufacturing sector and my conclusions about their dividend arrangements. In short, should these companies continue to pay dividends?

Use the money to grow

Allergan, Inc. (NYSE:AGN) is a mid-size company, fairly small by pharma standards. It pays a paltry 0.2% dividend yield. The company is driving $5.92 billion in trailing revenues and holding 14.9% profit margins, which tells me they’re doing good business and being reasonably cost-effective about it. It’s well-known for Botox, which is useful to treat some neuromuscular problems and to round out the lines in a person’s face. Should Allergan pay a dividend?

I vote no. Allergan, Inc. (NYSE:AGN) has a solid base with its flagship product, and room to develop more. The dividend almost seems like an afterthought, and presents a microscopic amount of income to normal investors. In this case, the money could be better spent pushing forward with the development of more great chemicals and marketing their eventual product incarnations.

Credit: Allergan, Inc. (NYSE:AGN)

The wrong time

Dr. Reddy’s Laboratories Limited (ADR) (NYSE:RDY) handles operations in the biotech and medical sectors of pharmaceuticals, and is best known for producing generic versions of drugs like Lipitor when the patents run out. Dr. Reddy’s is at a great pick, achieving approval in many regulated countries and gaining further information from unregulated ones. Should Dr. Reddy’s use some of its 14.4% profit margins on $2.19 billion in trailing revenue to pay a dividend?

Not a chance, says I. Dr. Reddy’s Laboratories Limited (ADR) (NYSE:RDY) is tiny by pharma standards at only a $6.44 billion market cap. And since even paying a 0.6% dividend essentially says the company isn’t up for hyper growth, that’s craziness. Particularly so when you consider the exploding market for generic prescription drugs among the world’s aging, fixed-income population. Dr. Reddy’s should be plowing that money into developing every drug possible and taking their operation to the next level — maybe even becoming the Wal-Mart Stores, Inc. (NYSE:WMT) of scrips.

Sometimes it’s a great idea

Novo Nordisk A/S (ADR) (NYSE:NVO) is poised to deliver some amazing things in growth hormone therapy, diabetes care, and hormone replacement. Working in the middle-aged and geriatric markets, Novo had tremendous opportunity as the diabetic population grows each year. With an older population and baby boomers entering menopause, it’s a great time to be in these fields. This doesn’t even count Novo Nordisk A/S (ADR) (NYSE:NVO)’s contributions to hemostasis or blood clotting — which is essential during surgical procedures. With a 28.3% profit margin on $13.93 billion in revenues, should Novo Nordisk continue to pay a dividend?

Why yes, yes it should. The profit margins are strong, this is already a $93 billion company and it’s only trading around 24 times earnings. So the days of super growth may be behind Novo Nordisk A/S (ADR) (NYSE:NVO). And that’s okay, because it can still be a decent deal and continue to be a great little money machine.

The Foolish bottom line

Dividends are great, but a dividend applied at the wrong time or when the money is needed elsewhere can be very destructive. A company should pay a dividend when it can commit to paying a reasonable amount and when its time of greatest growth is in the past.

The article Should These Drug Companies Continue to Pay a Dividend? originally appeared on Fool.com and is written by Chris Hodge.

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