Today I am looking at why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) could be in line for a painful dividend cut.
The prescription for payout problems
Thanks to a prolonged period of earnings growth, pharma giant AstraZeneca had forged a reputation as a reliable provider of year-on-year dividend growth. But as the effect of patent expirations have hammered revenues from its previously enviable suite of market-leading drugs, the firm’s earnings — and with it dividend — record has dropped off considerably.
Indeed, two years of earnings falls have forced the business to keep the total payment on hold at 280 US cents per share. And with declines to the tune of 15% and 7% pencilled in for 2014 and 2015 respectively, City analysts expect the London firm to bite the bullet and reduce the dividend to around 270 cents for both of the next two years.
Even though AstraZeneca has kept dividends frozen since 2011, yields have remained far above the British blue-chip average. And current projections suggest that this is set to continue, with prospective payments for 2014 and 2015 carrying yields of 3.9%, beating a forward average of 3.5% for the entire FTSE 100.
… while murky profits picture undermines long-term growth
Still, AstraZeneca’s expected decision to cut the dividend this year has seen the yield creep closer to that of its big-cap rivals.
And with forecasts through to the end of next year boasting meagre dividend coverage — payouts are covered just 1.6 times and 1.5 times by earnings in 2014 and 2015, well below the safety threshold of 2 times or above — the drugs giant may be forced to take the red marker to current dividend expectations.
The business confirmed in July that it aims to raise or at least maintain the full-year payout. However, it admitted that “some earnings fluctuations are to be expected as the… revenue base transitions through this period of exclusivity losses and new product launches,” a worrying portent considering its R&D team is still playing catch-up with its industry rivals.
AstraZeneca elected to pay out an interim dividend of 90 cents for the first half of the year, which it said was consistent with its target of paying out around a third of 2013’s total payout. But should the firm’s near-term sales forecasts sour and its product pipeline begin to stutter, the company may struggle to get close to last year’s sum in 2014.
Allied with the astronomical costs attributed to the business of pharmaceuticals research, and the cost of AstraZeneca’s establishment of a pan-global lab network — net debt rung in at a vast $4bn during January-June — dividends may come under pressure not just now but well into the future.