In Europe the name Hoffmann-La Roche is one of those company names that’s just as recognisable as Coca cola, Louis Vuitton or Adidas. Even before I first set foot in a McDonald’s restaurant – anyother one of those immensely recognisable brands – as a small child, I knew what Roche’s business was all about. And you probably did too. It’s what sets Roche apart from other companies and what makes its 28-year-long dividend growth streak possible.
That’s right, Roche (VTX:ROG) is one of the few companies able to boast an increased dividend payout for the 28th consecutive year already in 2015. As a dividend growth investor, it’s fantastic to hear that Roche is not only worthy of its strong brand name, but that it also manages to capitalise on its household presence. As such, I believe the Swiss pharmaceutical deserves a place in any dividend growth investor’s portfolio.
Hoffmann-La Roche was founded in 1896 by Fritz Hoffmann-La Roche and has since skyrocketed to become the third-largest pharma company worldwide based on its 2014 revenue of 47.46 billion Swiss Franks. With its headquarters located in Basel, which is also the home town of Novartis (VTX:NOVN), Roche operates worldwide under two divisions: Pharmaceuticals and Diagnostics.
Its Pharma division makes Roche one of the world’s leading providers of clinically differentiated medicines. With a strong focus on innovation, the company has managed to become the number one biotech company worldwide and a strong provider of cancer treatments. As such, the majority of Roche’s development pipeline consists of biopharmaceuticals and cancer treatment.
The second pillar of Roche’s strong foundation is its Diagnostics division, which develops diagnostic tests geared towards early detection, targeted screening, evaluation, and monitoring of disease. Because Roche is active in all major market segments, it can take advantage of its all-encompassing presence to provide integrated solutions to its customers. In doing so, Roche has gained a significiant competitive advantage over industry peers.
With the healh care sector likely to benefit from an ageing demographic and growing emerging markets, Hoffmann-La Roche could be in a fast lane to continued success. On top of that, Roche has one of the youngest and most profitable product porftolio’s. Its popular cancer therapies, Avastin and Herceptin, retain patent exclusivity for at least another five years, for example. Actemra, an antibody drug designed to treat rheumatoid arthritis, is also expected to reach blockbuster sales, both in Europe and North-America.
Potential investors will also be happy to hear that Roche’s development pipeline contains around ten drugs that could make it to the market over the next few years. Much of Roche’s development effort is focussed on different applications of already succesful drugs like Avastin. By applying this strategy the company hopes to extend the lifetime of its patents, thus securing billions in future revenue.
However, by doing so, the pharma company’s competitors have managed to get ahead in other areas. Johnson and Johnson (NYSE:JNJ), for example, makes for fierce competition in the diabetes and glucose metering business, while Bristol Myers (NYSE:BMY) and Merck (NYSE:MRK) are pulling ahead in oncology antibody research.
Of course, the success of competitors in different pharma sectors has little effect on Roche’s profitability because one should always analyse drug markets seperately. When JNJ manages to succesfully market a diabetes drug, there will be little to no effect on the profitability of an existing cholesterol drug by Roche, for example. More worrisome, however, is the possibility of increased competition from Novartis after its acquisition of GlaxoSmithKline‘s (LON:GSK) oncology business last year.
Currently Roche yields a healthy 3.09%, which amounts to 8.0 CHF in gross dividends per share at the current share price of 258.80 CHF. Because the Swiss Frank is no longer pegged to the Euro and as a result appreciated strongly, Roche shares are now trading closer to their 52-week low price of 238 CHF. About two months ago investors had to pony up 295 CHF for a single share of the pharma company.
Even though the Swiss drug maker boasts an impressive 28 years of increased dividend payments, growth has been slowing down over the past few years. While the 10 year dividend growth rate stands at 14.87%, the 5 year DGR remains a more modest 5.92%. Currency headwinds might put further pressure on dividend payout increases in the future. Roche’s payout ratio still sits at a comfortable 60%, however.
As someone who prefers defensive and long-term investments, it’s hard to pass up on Roche’s offering. Any dividend aficionado would agree that the Swiss pharmaceutical’s solid business performance, exclusive patents, innovative and marketable products in development, and reliable dividend growth make the stock into a possible corner stone investment of any passive income portfolio.
Even though Hoffmann-La Roche is based in Switzerland, international investors can buy shares directly from the Swiss Stock Exchange under the ROG ticker, but also in the form of an RHHBY ADR. Like many European companies Roche only pays dividends once every year. This policy slows the compounding effect when you re-invest your dividends, but it shouldn’t deter you from investing.
One major downside to Roche’s Switzerland listing is the rather high foreign withholding tax Switzerland imposes on dividend income. Nevertheless, I’ll be looking to jump into Roche in the very near future. By doing so I’ll be adding a second Swiss health care giant to my portfolio after my purchase of Novartis last month.
Do you consider Roche to be a good long-term defensive investment or would you rather invest in a different pharma company instead?