Is Teva's dividend safe?

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Teva Pharmaceuticals (NYSE: TEVA) is the world's largest manufacturer of generic drugs. Teva pays a solid dividend and has been a strong performer over the past decade thanks to growing demand for low cost medicine.
Despite that demand growth; however, the company faces a big risk to its revenue given the recent patent expiration on one of its own best selling specialty medicines. As a result, dividend investors are right to wonder whether a potential sales slide threatens Teva's dividend payout.
In the following slideshow, you'll learn more about Teva's patent risk, risk to its profitability and how Teva compares to big drug makers like Merck and Pfizer when it comes to its dividend payout.

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Is Teva's dividend safe?

  1. 1. Is Teva’s Dividend Safe?
  2. 2. Is Teva’s dividend safe? 1. Patent expiration – Teva lost patent protection on its $4 billion a year MS drug Copaxone on May 24th. • Copaxone represents more than 20% of Teva’s sales and half its profit. 2. Shrinking margin – Operating margin has dropped from more than 20% to less than 10% in the past five years. 2 important question marks hang over Teva’s dividend.
  3. 3. Patent expiration First, let’s consider Teva’s patent risk. Copaxone is an immensely important drug to the company, but its patent loss may not be as bad as some fear. Copaxone is a biologic and generic biosimilar versions of it have yet to win FDA approval. Biosimilars carry higher price tags and tend to capture less market share from branded versions compared to traditional generics too. Additionally, Teva is converting many Copaxone users to a long-lasting formula that requires fewer weekly injections and still enjoys patent protection. That means that for every month that passes without an approved biosimilar, Teva can convert more patients to its new version and shore up its balance sheet.
  4. 4. Shrinking margin Now, let’s take up the issue of falling margin. Investors are right to worry over thinning margin, but profitability has improved since last summer. Teva announced last fall that it’s cutting 5,000 jobs, eliminating $2 billion in annual costs by 2017; 50% of which could be realized this year. If so, operating expenses will be in much better shape to withstand any future lost Copaxone sales.
  5. 5. Reasons for dividend optimism 1. A pipeline of new products. – The majority of Teva’s sales come from launching generic drugs and the patent expiration calendar is in the company’s favor. • Patent expiration climbs from $28 billion in brand drugs in 2013 to $34 billion in 2014 and $66 billion in 2015. – New business opportunities. • 15 new therapeutic entities in development that improve proven drugs already on the market. – $1 billion to $1.5 billion in annual sales potential in 2018. • 8 specialty medicines in phase 3 trials, including 4 in respiratory. Teva is working its way through its operational challenges and new revenue opportunities boost investor confidence.
  6. 6. Cash dividend payout Teva’s cash dividend payout ratio, a measure of cash minus capital expenses and preferred dividends, is in good shape at just 27%. That puts Teva’s ratio below big pharmaceutical manufacturers including Pfizer and Merck and suggests an opportunity for dividend payout growth if cost savings play out as hoped and Copaxone sales remain protected.
  7. 7. Current yield Teva’s current dividend yield of 2.34% trails the dividend yields offered by big pharmaceutical companies Pfizer and Merck, mostly due to shares jumping from less than $37 last year to more than $50. However, questions remain over Copaxone, creating risk that may be too great for some dividend investors. If so, dividend investors may be better suited buying those big drug companies such as Pfizer where the worst of the patent cliff has already happened and yields are higher.
  8. 8. . 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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