Sanofi-Aventis: 'Solid, defensive buy'

by Paul Tracy, editor High-Yield International

Pharmaceutical giant Sanofi-Aventis (SNY) remains one of the best defensive dividend plays in the current market environment.

In September, management outlined a compelling case that it will be able to achieve annualized revenue growth of 5% or more between 2012 and 2015.

One of the only negative factors hanging over the healthcare industry group is the potential for government budget cutbacks to hit demand for drugs and medical services.

In the U.S., healthcare spending -- mainly through Medicare and Medicaid -- accounts for close to one-quarter of total U.S. federal spending.

That means that it's next to impossible for the government to cut spending and reduce the deficit without impacting spending on healthcare.

Any such cuts would likely take the form of a reduction in the reimbursement rates doctors receive from Medicare and Medicaid. In fact, some cuts are already part of the healthcare reform law passed in 2010.

But Sanofi has some of the lowest exposure to Medicare and Medicaid spending of any major pharmaceutical company -- management estimates that these programs account for less than 7% of revenues.

Sanofi's exposure to spending by European governments on healthcare is higher, but management has factored continued austerity measures aimed at reducing healthcare spending into its long-term growth estimates.

Sanofi has been hit in recent years by several high-profile patent expirations including Plavix, a blockbuster drug to prevent blood clotting.

But the bulk of Sanofi's major patent expirations is behind the company, and the firm has one of the most attractive late-stage pipelines in the industry.

Several of these drugs, including cancer drug Zaltrap and a new meningitis vaccine, could become blockbusters as they're released over the next several years.

Sanofi pays dividends annually in May and currently yields about 4%, based on its May 2011 payout of $1.822.

But I expect management to grow its dividend at roughly the same rate as overall revenue in coming years, implying annualized growth of 5% to 10% through 2015.

Even assuming the low end of that range, Sanofi could easily pay out more than $2.10 per U.S.-traded ADR by 2015. At current prices that represents a yield of about 6.4%    

Action to Take --> A defensive play with steady earnings and dividend growth potential, Sanofi-Aventis is a solid buy in the current volatile market environment.

Learn more about this financial newsletter at Paul Tracy's High-Yield International.