5/18/2013

A Closer Look at AstraZeneca's Dividend Potential

LONDON -- Dividend income accounts for around two-thirds of total returns, the actual rate of return taking into account both capital and income appreciation. Given that share prices are often volatile and unpredictable, the potential for plump dividends can give shareholders much-needed peace of mind for decent returns.

I am currently looking at the dividend prospects of AstraZeneca  (LSE: AZN  ) (NYSE: AZN  ) and assessing whether the company is an appetizing pick for income investors.

How does AstraZeneca's dividend history stack up?

  2009 2010 2011 2012
FY Dividend Per Share $2.30 $2.55 $2.80 $2.80
DPS Growth 12.2% 10.9% 9.8% -
Dividend Cover 2.7x 2.6x 2.6x 2.3x

Source: AstraZeneca company accounts.

Prior to 2012, AstraZeneca kept the dividend rolling higher in lockstep with earnings. However, the dividend growth rate has steadily decreased in recent years, and last year the firm kept the full-year payout on hold as earnings per share dipped 12% lower.

The result of falling income also caused dividend cover to slip noticeably last year, even if coverage remained above the broadly regarded safety threshold of 2 times forward earnings.

What are AstraZeneca's dividends expected to do?

  2013 2014
FY Dividend Per Share $2.75 $2.79
DPS Growth -1.8% 1.5%
Dividend Cover 1.9x 1.8x
Dividend Yield 5.4% 5.5%

Source: Digital Look. Exchange rate: £1=$1.52873.

City analysts expect the dividend to fall this year as EPS heads almost 20% lower, although moderating losses in 2014 -- a 4% decline is predicted -- will prompt the firm to lift the dividend fractionally, according to broker estimates.

Constant earnings pressure is also expected to push dividend cover below 2 times earnings, a situation which worsens the firm's already-precarious dividend outlook.

AstraZeneca announced late last month that revenues had slipped 12% in the January-March period at constant exchange rates, to $6.4 billion, in turn sending pre-tax profit 31% lower to $1.3 billion. The company is suffering heavily from a loss of exclusivity on a range of its products, and Q1's insipid performance was attributed to accelerating competition for its Seroquel IR and Atacand drugs in numerous markets, as well as Crestor in Canada.

The company has announced ambitious restructuring plans to boost R&D work and mitigate patent expiry across a whole host of its pharma products. But measures to address a weak pipeline will take years to bear fruit, during which time revenues are likely to come under sustained pressure.

How does AstraZeneca's dividend prospects rate against the competition?

  Prospective Dividend Yield Prospective P/E Ratio
Pharmaceuticals & Biotechnology 2.5% 48
FTSE 100 3.2% 15.7

Source: Digital Look.

AstraZeneca currently trades on a P/E readout of 9.9 for 2013, substantially below the comparative readings for both the wider pharmaceuticals space and the FTSE 100. Although a handful of rival pharma plays have distorted the group valuation, the firm still looks relatively cheap at face value versus its major peers.

In my opinion AstraZeneca's lowly price rating is justified, however, as an absence of meaty product development, combined with patent expiry in a number of areas, look set to keep the balance sheet under the cosh.

Although the firm has said that it "intends to maintain or grow the dividend each year," and the dividend yield is predicted to remain comfortably above 5% this year and next, a worsening earnings outlook could put future payments in jeopardy in my opinion. I believe that juicy dividend payers carrying less risk can be sought elsewhere.

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