There are ~60,000 publicly-traded stocks in the world.
The US alone has something like 10,000.
How does one sift through all of that and get to the best investment opportunities?
After all, nobody has time for 60,000 investments.
Besides, only a small fraction are going to be great investments anyway.
Well, this is where dividend growth investing shines.
This long-term investment strategy limits investors to only those companies that are so great and adept at generating ever-more profit that they share the spoils with shareholders via ever-larger cash dividends.
It’s a virtuous circle, whereby growing dividends can only be funded by growing profits, and growing profits can only be generated when a business is doing a lot of things right.
The Dividend Champions, Contenders, and Challengers list proves my point.
This list has compiled invaluable information on hundreds of US-listed stocks that have raised dividends each year for at least the last five consecutive years.
All are paying out rising cash dividends to shareholders – a fantastic source of escalating passive income that can unlock financial freedom.
And since this list has less than 1,000 names, it’s an effective initial filter.
I’ve been using the dividend growth investing strategy for 15 years.
In doing so, I’ve built the FIRE Fund.
That’s my real-money portfolio, and it produces enough five-figure passive dividend income for me to live off of.
This strategy allowed me to reach financial freedom and retire in my early 30s.
That’s something I discuss in detail in my Early Retirement Blueprint.
Now, while dividend growth investing is a great initial filter, valuation is another highly effective – and necessary – filter.
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.
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.
Sticking to undervalued high-quality dividend growth stocks is a fantastic way to filter the gigantic global stock market and build wealth, passive dividend income, and financial freedom over time.
All of this valuation talk may seem difficult to grasp at first, but it’s really not.
Lesson 11: Valuation, written by fellow contributor Dave Van Knapp, demystifies the whole concept of valuation by using simple terminology to break it down into ideas that are easy to understand.
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) is a French multinational pharmaceutical and healthcare company.
Founded in 1973, Sanofi is now a $109 billion (by market cap) Big Pharma player that employs approximately 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%.
Established pharmaceutical giants like Sanofi are broadly positioned very favorably, as the world is growing larger, older, and wealthier – all adding up to increased demand for quality healthcare solutions.
The world recently saw its number of people over the age of 65 surpass the number of people under the age of 5 for the first time ever.
With more older people of means walking around, you can almost draw a straight line from that to more healthcare spending.
That leads us back to 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 only the company’s largest product but also one of its fastest-growing products.
The drug showed an astounding 25.2% YOY growth for FY 2025 – an incredible rate of growth at this scale.
This blockbuster is still in the prime of its life, on main patent protection until the early 2030s.
That gives Sanofi plenty of time to develop its pipeline and bring to market the solutions it demands, meaning the company has a long runway ahead for continued revenue, profit, and dividend growth.
Dividend Growth, Growth Rate, Payout Ratio and Yield
Indeed, Sanofi has increased its dividend for 31 consecutive years.
That’s a fantastic track record.
If this were an American company in the S&P 500, it’d be a Dividend Aristocrat.
Its 10-year dividend growth rate is 12.1%.
Terrific.
While double-digit dividend growth is always nice, what makes it especially juicy in this case is the fact that the stock yields a jaw-dropping 5.4%.
This market-smashing yield is 150 basis points higher than its own five-year average
Obviously, a yield this high paired with double-digit dividend growth is almost unheard of.
But it’s also not necessarily reflective of where things are at, as this high rate of dividend growth has been afforded by payout ratio expansion.
Notably, Sanofi just increased its dividend at the end of January by 5.1%, which represents a material slowdown.
Still, when one is already getting a yield in the mid-5% area to start with, that’s enough dividend growth to make sense of things.
The payout ratio of 64.4% shows a secure, well-covered dividend, but this payout ratio has climbed to a point where much further expansion would be unhealthy and unwise.
The dividend is now set to grow roughly in line with the business from here.
Again, I think that’s just fine, as the stock already offers a level of yield that’s usually reserved for leveraged income plays (like REITs).
In my view, this is a fantastic dividend setup.
Revenue and Earnings Growth
As fantastic as it may be, though, this setup is largely predicated on what’s happened in the past.
However, investors must always be planning for the future, as the capital of today is risked for the rewards of tomorrow.
As such, I’ll now build out a forward-looking growth trajectory for the business, which will be incorporated into the valuation process.
I’ll first show you what the business has done over the last decade in terms of its top-line and bottom-line growth.
And I’ll then reveal a professional prognostication for near-term profit growth.
Amalgamating the proven past with a future forecast in this way should give us the ability to reasonably judge where the business could 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, with most of it coming in the second half of the last decade after Dupixent was introduced and then took off.
Meanwhile, 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 latter half of the prior decade.
If we zoom in further, FY 2025 showed 9.9% YOY revenue growth and 15% YOY EPS growth.
Dupixent is in its prime right now, setting up the next several years for excellent growth.
Simultaneously, Sanofi is buying back its own shares left and right, which should add another tailwind to EPS growth (due to the shrinking float).
After just completing its recent €5 billion buyback program, Sanofi announced that it intends to execute a €1 billion buyback program in 2026.
Looking forward, CFRA believes that Sanofi will compound its EPS at an annual rate of 7% over the next three years.
CFRA expresses enthusiasm about Sanofi’s one-two punch of Dupixent leadership and new launches providing a greater contribution to the overall sales pie.
While a 7% growth rate would represent better growth relative to what transpired over the last 10 years, I think this is selling Sanofi short.
It did 15% YOY growth for FY 2025, and its main blockbuster is just now hitting its full stride.
Moreover, Sanofi’s acquisition and pipeline strategies are robust.
Recent acquisitions such as Blueprint Medicines, Dren Bio, and Vigil boost Sanofi’s capabilities.
The company’s pipeline has 80 clinical-stage projects, with 28 in Phase 3.
And Sanofi has proven follow-up success in the market, with recent launches producing 49.4% YOY sales growth for Q4 FY 2025 alone.
R&D spending, making up about 20% of net sales, is bearing fruit.
In my view, CFRA’s 7% number seems a bit light.
However, even if that is a realistic expectation, that would still set the dividend up for similar growth over the near term.
And you’re getting that on top of a starting yield of over 5%.
I think that’s a highly appealing mix of yield and growth.
Of course, there’s the looming patent cliff for Dupixent, but that’s several years out.
This is in some ways reminding me of the setup that AbbVie Inc. (ABBV) had back in 2019, where it had a really low valuation and 5% yield on its stock because of a patent cliff fears over Humira – and we all know how that worked out.
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.
Good ratios for sure, but they belie Sanofi’s true financial strength.
First of all, cash offsets about half of what little long-term debt Sanofi has, putting net long-term debt at €6.5 billion – immaterial for a company of this size.
Also, the company’s credit ratings are excellent and well into investment-grade territory: Aa3, Moody’s; AA, S&P.
Profitability is good.
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 Sanofi’s margins are fairly strong.
Overall, this is a fantastic member of the Big Pharma cadre.
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.
Overall, I see risks here as being pretty standard for the business model.
However, the valuation is well below average – despite Sanofi actually being above average in a few ways (such as its balance sheet)…
Valuation
The P/E ratio is sitting at 11.9.
For a company that’s proven out double-digit growth, that’s an absurd earnings multiple.
It’s well below its own five-year average of 16.7 – and even that five-year average is low.
While this screams “bargain” at first glance, I think the market is right to be concerned about the patent cliff, as Sanofi is heavily reliant on one drug accounting for about 1/3 of its sales.
But at what point do we price in too much of that and become too pessimistic?
We might be there already.
The sales multiple of just 2, which is undemanding, is well below its own five-year average of 2.6.
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%.
My model might seem cautious when viewed against the 12%+ 10-year dividend growth rate, but Sanofi’s recent dividend raise of 5.1%, the near-term EPS growth forecast of 7%, the demonstrated EPS growth over the prior decade, and the upcoming patent cliff cause me to lean conservative.
When you zero in on that recent dividend raise, which I think is a great check on where things are at currently, that sets the table for mid-single-digit dividend growth.
The good news is, because the multiples are so low and the yield so high, Sanofi doesn’t have to move the growth needle much in order to make the stock appealing.
As long as the company can limit the patent cliff damage, properly manage the pipeline, avoid disastrous acquisitions, and hand out mid-single-digit dividend raises, one can do well here.
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.
I see a case for the stock to be priced meaningfully higher than it is right now.
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 4-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 $57.00.
I came out to within pennies of where Morningstar is. Averaging the three numbers out gives us a final valuation of $61.02, which would indicate the stock is possibly 28% undervalued.
-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 90. 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 Very Safe with a very 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 have no position in SNY.