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Sanofi's Risk Increases on Acquisition Miss

- By Sangara Narayanan

French pharma giant Sanofi (SNY) has been having a forgettable 2016, with stocks sliding by more than 18% in the last year. Net sales in the first six months of the current fiscal declined to 15.926 billion euro from 16.629 billion euro last year, sending the stock lower. The steady drop in the past year has brought the company's dividend yield to an extremely attractive 4.2% yield. But how safe is the dividend?


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As is the case with any company that is having trouble increasing its sales, Sanofi had to dip into the debt bucket to fund its dividend payment and share repurchase program. Net debt has gone up from 7.2 billion euro by end of last year to near 11 billion by the end of June 2016. The company has increased dividends for the last 22 years, and companies like that have a lot of pride at stake and will do their best to continue the growth.

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But the problem is Sanofi is expecting a full 4% hit on their EPS due to currency headwinds this year, and things are not going to be easy for the company to keep increasing the dividend payout. But the good news is the company's long-term debt at the end of June was at 14 billion euro, and with more than 5 billion euro in annual operating income, Sanofi does have the financial strength to keep its dividend payout steady until its top line returns to growth.

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The more important matter at hand, though, is how long Sanofi will take to start posting top line expansion once again. Sanofi's total sales have been nearly flat since 2011 and have declined 4.3% during the second quarter of this year compared to prior period. Currency headwinds have been eating at the top line, while increased competition severely affected their top products.

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"The French drugmaker will use acquisitions to strengthen its business in key areas including oncology, concentrating on "bolt-on" or mid-sized deals, Chief Executive Officer Olivier Brandicourt told analysts in a separate conference call. "Large M&A today is not part of our agenda," he said." - Bloomberg

The company has been shopping for a pipeline and was in negotiations with Medivation. After a long back and forth period, however, the deal fell through and Pfizer (PFE) bagged it instead. That puts Sanofi back in the market for a new molecule. An acquisition at this point will alleviate their short-to-medium-term pain, even if the additional debt load puts a commensurate amount of pressure on their ability to keep the dividend growth intact.

But with a track record of 22 years of dividend growth, don't expect them to give it it up now. Dividends will keep growing, but perhaps not as fast as you like. But with a decent yield on offer, it may well be worth the slightly risky bet.

Disclosure: I have no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.

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This article first appeared on GuruFocus.