Today I am looking at pharmaceuticals giant AstraZeneca‘s (LSE: AZN) (NYSE: AZN.US) dividend outlook past 2014.
Dividend outlook in the sick bay
AstraZeneca has faced a continued backdrop of profits pressure in recent years, as the effects of patent expirations across many of its key products — not to mention the firm’s belated measures to address this issue — have whacked revenues.
As a consequence, AstraZeneca is expected to post a second-consecutive annual earnings drop in 2013 — results for which are due on Thursday 6 February — with a huge 23% decline. Analysts expect the situation to gradually improve over the medium term, although earnings declines of 8% and 2% for 2014 and 2015 correspondingly indicate enduring sales problems.
Although full-year dividends have advanced at a compound annual growth rate of 8.1% since 2008, AstraZeneca was forced to keep the dividend on hold in 2012 in line with earnings weakness. And the prospect of fresh pressure on the bottom line is anticipated to hinder near-term growth.
Indeed, analysts expect the payout to increase just 0.8% in 2013 to 282.1 US cents per share, with an additional 1% rise predicted this year to 284.9 cents. But the shareholder payment is expected to dip in 2015 to 282.7 cents, a 0.8% drop.
It is worth bearing in mind that anticipated payments for this year and next still result in bubbly yields of 4.5% and 4.4% respectively, crushing the FTSE 100 of 3.1%. However, investors should be mindful that dividend cover comes through 2015 comes in at just 1.6 times prospective earnings, comfortably below the widely-considered security threshold of 2 times. This could be a significant issue should earnings collapse below expectations.
As well, the company’s cash situation also continues to deteriorate as a result of declining profits, another worrying omen for dividend funding. Although the firm punched free cash flow of $4.79bn during the first nine months of 2013, this was down substantially from $5.8bn during the corresponding 2012 period.
Indeed, capital flows were affected by the substantial amounts of capital being ploughed into R&D in order to rejuvinate its flagging drugs pipeline — capital expenditure jumped more than 40% to $1.89bn during January-September.
The drugs specialists are taking massive steps in order to facilitate future growth, from the establishment of new research bases across the globe through to making significant acquisitions to kickstart its organic product development. The company received a fillip in recent days when its Xigduo diabetes medicine was the latest in its line of products to be given the green light, this time for sale in Europe.
But in my opinion AstraZeneca still has some way to go to boost its drugs portfolio and compensate for patent expirations across its big sales drivers, and I believe that dividends could come under the cosh should earnings continue to drag heavily.