Is AstraZeneca's Dividend Safe?

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AstraZeneca (NYSE: AZN) is one of the globe's biggest drug companies. The company generates more than $20 billion in annual sales and given its dividend yield is nearly 4%, its shares are often included in dividend investor's portfolios. Although AstraZeneca has recently jumped because of M&A interest from Pfizer (NYSE: PFE), investors are right to wonder whether patent expiration on top selling drugs and falling margin could threaten AstraZeneca's dividend if it remains an independent company. In the following slideshow you'll learn whether I think AstraZeneca's dividend is safe and see how AstraZeneca's dividend matches up to Pfizer and former diabetes partner Bristol Myers (NYSE: BMY).

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Is AstraZeneca's Dividend Safe?

  1. 1. Is AstraZeneca’s Dividend Safe?
  2. 2. Is AstraZeneca’s dividend safe?  Patent expiration. – Seroquel • Facing generics overseas. • Q1 sales fell 16% overseas to $126 million YoY. – Nexium • Expected to face generics this year. • $930 million in first quarter sales. – Atacand • Facing generic competition in the U.S. • U.S. sales tumbled 59% to $11 million in Q1. • Ex-U.S. sales fell 19% to $119 million. – Toprol • Facing generic competition in the U.S. • U.S. sales down 57% to $24 million. – Crestor • Loses patent protection in 2016. • Global sales of $1.3 billion in Q1. – Symbicort/Pulmicort • Combination patent expiration this year. • EU CHMP positive opinion on Teva’s generic Symbicort in February. • EU sales of $386 million in Q1.  Shrinking margin. 2 big and important question marks hang over Astra’s dividend.
  3. 3. Patent expiration • Astra’s sales have slumped from their 2010 peak as patent expiration on key drugs have more than offset new product launches. Sales have fallen from $33 billion to less than $26 billion over the period and pressure is likely to remain high given the loss of protection on Nexium and Symbicort. Astra will face an additional patent headwind in 2016 when its top selling cholesterol busting drug Crestor loses patent protection. Overall, Astra has its hands full in stabilizing sales. • That said, following Pfizer’s overture Astra’s forecast is to return to 2013 revenue levels by the end of 2017; positioning it for growth through 2024. First, let’s consider Astra’s patent calendar. Astra forecasts sales could exceed $45 billion by 2024.
  4. 4. Shrinking margin Now, let’s take up the issue of falling margin. Operating margin has fallen sharply as sales have slid, dropping from more than 37% in 2011 to roughly 12%. As a result, net income has been cut from more than $9 billion to just $2 billion for the trailing 12 months. However, Astra has embarked on a major restructuring that includes eliminating 5,600 jobs. In total, Astra’s cost-cutting initiatives aim to reduce spending by $2.5 billion annually. If so, that will go a long way to reversing the margin trend.
  5. 5. Reasons for dividend optimism 1. New products offer opportunity. 1. Astra has increased its exposure to diabetes. • The company bought the half of its diabetes joint venture it didn’t own from Bristol Myers in February. – Portfolio includes GLP-1 drugs Bydureon and Byetta that compete against Novo Nordisk’s Victoza. – Astra recorded $347 million in diabetes sales during Q1 (up 106% YoY). • Won approval for next generation SGLT-2 drug Farxiga in January – Competes with Johnson & Johnson’s SGLT-2 drug Invokana. 2. Plans four to five new phase 3 trial starts in 2014. 3. 11 new molecular entities currently in phase 3 trials. 4. Significant oncology opportunity. 1. Current cancer drug sales near $725 million in Q1. 2. 9 late stage cancer drug trials ongoing. 3. PD-L1, PARP, & EGFR targeting drugs with big potential.
  6. 6. Trailing 12 month dividends • Astra’s trailing 12 month dividend payments have flattened in the face of falling sales. Meanwhile, payments made by GlaxoSmithKline, which competes against Astra in asthma and COPD with its drug Advair, and Novo Nordisk, which competes with Astra in diabetes, have climbed.
  7. 7. Cash dividend payout Astra’s cash dividend payout ratio, a measure of how much of its operating cash after paying for capital expenses and preferred dividends, is quite high at 89%. That puts its payout ratio north of potential suitor Pfizer and Astra’s former diabetes partner Bristol Myers. Astra’s high payout ratio suggests that the company may be less able to boost dividends without the benefit of sales or profit growth than other drugmakers.
  8. 8. Current yield Astra’ s current dividend yield of 3.78% is enticing, but Astra faces big risks tied to its patent calendar, falling net income, and current payout ratio. As a result, while Astra shares yield more than Pfizer and Bristol Myers, the company is a speculative dividend play that is trading on its acquisition potential rather than sales and earnings growth. While the current dividend payout is likely safe, risk averse dividend investors may be better served considering other stocks.
  9. 9. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

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