When it comes to investing, the “old ways” are oftentimes the “best ways”.
Some things are timeless.
As someone who’s been consistently investing for more than 15 years, I’m baffled by the leverage, gambling, and wipeouts people seem attracted to these days.
It’s so much work and stress, and one almost always comes out worse for the wear.
Instead, one could simply utilize dividend growth investing.
This long-term investment strategy, whereby one buys and holds shares in world-class businesses paying out steadily growing cash dividends, nearly guarantees financial independence over time.
But you’ve gotta stick with it through thick and thin, and you’ve gotta ignore the rest.
By the way, you can find hundreds of stocks qualifying for this strategy in the Dividend Champions, Contenders, and Challengers list – a fantastic resource covering US-listed stocks that have raised dividends each year for at least the last five consecutive years.
These tend to make for excellent long-term investments, as it takes a certain amount of business excellence in order to reliably pay and raise cash dividends to shareholders.
I’ve stuck to this strategy for the last 15+ years myself.
It’s helped me immensely, guiding me as I’ve gone about building the FIRE Fund.
That’s my real-money portfolio generating enough five-figure passive dividend income for me to live off of.
This is what unlocked financial independence for me, even allowing me to retire in my early 30s.
Now, this strategy is more than just investing in excellent businesses.
It’s also about investing at excellent valuations.
And that’s because price only tells you what you pay, but value tells you what you get.
An undervalued dividend growth stock should provide a higher yield, greater long-term total return potential, and reduced risk.
This is relative to what the same stock might otherwise provide if it were fairly valued or overvalued.
Price and yield are inversely correlated. All else equal, a lower price will result in a higher yield.
That higher yield correlates to greater long-term total return potential.
This is because total return is simply the total income earned from an investment – capital gain plus investment income – over a period of time.
Prospective investment income is boosted by the higher yield.
But capital gain is also given a possible boost via the “upside” between a lower price paid and higher estimated intrinsic value.
And that’s on top of whatever capital gain would ordinarily come about as a quality company naturally becomes worth more over time.
These dynamics should reduce risk.
Undervaluation introduces a margin of safety.
This is a “buffer” that protects the investor against unforeseen issues that could detrimentally lessen a company’s fair value.
It’s protection against the possible downside.
By ignoring rampant speculation and instead sticking to a long-term plan centered on consistently acquiring undervalued high-quality dividend growth stocks, financial independence is almost an inevitability.
Of course, the whole concept of valuation almost seems academic and mystical.
But it’s not.
It’s based on concrete principles.
These principles are described in Lesson 11: Valuation, which was written by fellow contributor Dave Van Knapp as part of a series of “lessons” designed to teach the dividend growth investing strategy.
With all of this in mind, let’s take a look at a high-quality dividend growth stock that appears to be undervalued right now…
Sanofi SA (SNY)
Sanofi SA (SNY) is a French multinational pharmaceutical and healthcare company.
Founded in 1973, Sanofi is now a $98 billion (by market cap) Big Pharma member employing around 75,000 people.
FY 2025 revenue can be broken down by therapy areas: Immunology, 37%; Other Main Medicines, 27%; Vaccines, 18%; Rare Diseases, 15%; Oncology, 2%; and Neurology, 1%.
Pharma giants like Sanofi are in a favorable position.
After all, the world is growing larger, older, and wealthier – simultaneously.
This leads to upward demand for healthcare broadly.
More older people walking around with more money almost inherently means more healthcare demand and spending, which leads right to the likes of Sanofi.
Sanofi controls one of the world’s best-selling drugs in Dupixent, which treats chronic, moderate-to-severe inflammatory diseases (such as asthma and eczema).
This one drug alone did over 15 billion euros in sales last year and accounts for about 1/3 of Sanofi’s annual revenue.
The exciting thing about it is, it’s not just the company’s largest product but also one of its fastest-growing products.
The drug put up 25.2% YOY growth for FY 2025 alone.
And this blockbuster drug is still in its prime, on main patent protection until the early 2030s.
That gives Sanofi plenty of time to develop its pipeline and bring to market new solutions.
The runway for this company’s revenue, profit, and dividend growth is long and wide.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Already, Sanofi has increased its dividend for 31 consecutive years.
It’s only because this is not an American company in the S&P 500 that it’s not a Dividend Aristocrat.
Nonetheless, it’s a very impressive track record.
Making matters even more impressive, its 10-year dividend growth rate is 12.1%.
Excellent.
Despite having 20+ years of dividend growth in the bag 10 years ago, Sanofi has spent the last decade compounding the dividend at a double-digit rate.
Oftentimes, dividend growth slows meaningfully once a company is already a decade or two into consistent dividend growth, but that has not happened here.
What’s particularly terrific in this case is the fact that the stock also yields a jaw-dropping 5.8%.
It’s incredibly rare to see a ~6% yield and a 12%+ dividend growth rate.
This market-smashing yield, by the way, is also 180 basis points higher than its five-year average, so now is an unusually good time to look at this name.
However, with the payout ratio sitting at 75.6%, based on FCF, which is elevated, I would expect more modest dividend growth over the next several years.
Still, with the starting yield so much higher than usual, lower dividend raises have already been baked in.
It’s really a nice dividend profile, especially for those who lean more toward current income.
Revenue and Earnings Growth
As nice as it may be, though, we’re mostly basing that on past numbers.
However, investors must always be preparing for future numbers, as today’s capital is risked for tomorrow’s rewards.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be useful during the valuation process.
I’ll first show you what the business has done over the last ten years in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Lining up the proven past with a future forecast in this manner should give us the information necessary to gauge where the business might be going from here.
Sanofi increased its revenue from €34.7 billion in FY 2016 to €43.6 billion in FY 2025.
That’s a compound annual growth rate of 2.6%.
Decent top-line growth which was weighted toward the latter half of the last decade after Dupixent was introduced and then quickly became a blockbuster.
Meantime, earnings per share increased from €3.66 to €6.40 over this period, which is a CAGR of 6.4%.
Again, this is weighted toward the second half of the prior decade.
If we zoom in a bit, FY 2025 showed 9.9% YOY revenue growth and 15% YOY EPS growth.
Zooming in further, H1 2026 registered 33.3% YOY CER EPS growth.
Dupixent is in its prime right now, driving heavy growth for the entire firm.
Simultaneously, Sanofi is aggressively buying back shares and reducing its float.
Looking forward, CFRA believes that Sanofi will deliver high-single-digit EPS growth over the near term.
CFRA’s near-term operating EPS forecast basically calls for a continuation of the status quo, implying 6% to 7% bottom-line growth.
That’s squarely in line with what Sanofi has done over the last decade.
CFRA notes a healthy pipeline and successful launches, but the patent cliff approaching in the next five years does weigh on enthusiasm and sentiment.
I think it’s a fair and balanced view, and it’s one I’m inclined to agree with.
Putting that kind of expectation on Sanofi’s earnings would pin the dividend for something similar.
Layering that on top of the rich yield could add up to a 6% or so starting yield and a 6% or so growth rate.
Honestly, if every investment I had gave me that kind of even split between high yield and inflation-beating growth, I’d probably be pretty happy.
Financial Position
Moving over to the balance sheet, Sanofi has a great financial position.
The long-term debt/equity ratio is 0.2, while the interest coverage ratio is 11.
These are very decent ratios, but they don’t tell the full story.
Cash offsets about half of long-term debt, putting net long-term debt at €6.5 billion – fairly insignificant for a company of this size.
I’d also note the company’s credit ratings are excellent and well into investment-grade territory: Aa3, Moody’s; AA, S&P.
Profitability is solid.
Return on equity has averaged 9.3% over the last five years, while net margin has averaged 18.3%.
I’d like to see higher returns on capital, but the margins are strong.
Overall, this is a worthy member of the Big Pharma club.
And with economies of scale, patents, IP, R&D, barriers to entry, and a global distribution network, the company does benefit from durable competitive advantages.
Of course, there are risks to consider.
Litigation, regulation, and competition are omnipresent risks in every industry.
All three of these risks are elevated for this business model relative to the average business model, in my view.
Regulation is a particular issue, with the company having to work through lengthy and costly regulatory processes in different jurisdictions in order to bring products to markets.
All pharmaceutical companies face rolling patent cliffs (with more successful drugs ironically leading to bigger cliffs), and Sanofi is facing one of its biggest ever in the early 2030s after Dupixent starts to lose patent protection.
This leads to ongoing pipeline risks, as Sanofi must continue to manage and grow its pipeline (either organically or through acquisitions) in order to develop more future blockbusters.
Because Sanofi is acquisitive, capital allocation and execution are key risks.
Being a global enterprise, Sanofi is exposed to geopolitics and exchange rates.
Speaking of politics, current unrest in France is an overhang (more on the stock/sentiment than the business/fundamentals).
I see plenty of risks, but most of them are somewhat standard for this particular business model.
However, what’s not standard right now is the low valuation…
Valuation
The P/E ratio is just 12.5, using business EPS.
Although the P/E ratio on the ADRs is higher using GAAP earnings, that is inaccurate due to accounting quirks.
Putting a finer point on things, the stock’s cash flow multiple (which bypasses those quirks) is only 7.2.
That’s far below its own five-year average of 11.1, as well as way lower than what a lot of peers are commanding right now.
And the yield, as noted earlier, is significantly higher than its own recent historical average.
So the stock looks cheap when looking at basic valuation metrics. But how cheap might it be? What would a rational estimate of intrinsic value look like?
I valued shares using a dividend discount model analysis.
I factored in a 10% discount rate and a long-term dividend growth rate of 6%.
It’s almost obvious to assume 6% dividend growth from here.
Sanofi’s EPS growth over the last decade has slightly exceeded this mark, and the near-term forecast is for more of the same.
While the 10-year dividend growth is more than twice this mark, that’s come at the expense of a high payout ratio.
It’d be prudent for Sanofi to advance the dividend in line with (or less than) the business’s advancement over the next several years in order to contain, or even lower, the payout ratio.
The DDM analysis gives me a fair value of $63.07.
The reason I use a dividend discount model analysis is because a business is ultimately equal to the sum of all the future cash flow it can provide.
The DDM analysis is a tailored version of the discounted cash flow model analysis, as it simply substitutes dividends and dividend growth for cash flow and growth.
It then discounts those future dividends back to the present day, to account for the time value of money since a dollar tomorrow is not worth the same amount as a dollar today.
I find it to be a fairly accurate way to value dividend growth stocks.
This looks like a bargain to me.
But we’ll now compare that valuation with where two professional stock analysis firms have come out at.
This adds balance, depth, and perspective to our conclusion.
Morningstar, a leading and well-respected stock analysis firm, rates stocks on a 5-star system.
1 star would mean a stock is substantially overvalued; 5 stars would mean a stock is substantially undervalued. 3 stars would indicate roughly fair value.
Morningstar rates SNY as a 5-star stock, with a fair value estimate of $63.00.
CFRA is another professional analysis firm, and I like to compare my valuation opinion to theirs to see if I’m out of line.
They similarly rate stocks on a 1-5 star scale, with 1 star meaning a stock is a strong sell and 5 stars meaning a stock is a strong buy. 3 stars is a hold.
CFRA rates SNY as a 4-star “BUY”, with a 12-month target price of $53.00.
I’m almost exactly in line with where Morningstar is at. Averaging the three numbers out gives us a final valuation of $59.69, which would indicate the stock is possibly 31% undervalued.
Bottom line: Sanofi SA (SNY) is a deserving member of Big Pharma. It has one of the world’s best-selling drugs while it’s still in its prime, and the business as a whole is putting up terrific numbers on modest leverage. With a market-smashing yield, double-digit dividend growth, a workable payout ratio, more than 30 consecutive years of dividend increases, and the potential that shares are 31% undervalued, long-term dividend growth investors looking for an alluring and balanced mix of yield and growth have an ideal candidate on their hands here.
-Jason Fieber
Note from D&I: How safe is SNY‘s dividend? We ran the stock through Simply Safe Dividends, and as we go to press, its Dividend Safety Score is 80. Dividend Safety Scores range from 0 to 100. A score of 50 is average, 75 or higher is excellent, and 25 or lower is weak. With this in mind, SNY’s dividend appears Safe with an unlikely risk of being cut. Learn more about Dividend Safety Scores here.
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
Disclosure: I’m long SNY.
