Does AstraZeneca plc (ADR) (AZN)’s Dividend Have Room to Soar?

Published on March 15, 2013 at 9:45 am by The Motley Fool in News

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Valuation
Not all dividends are created equal. At first glance, a high dividend yield may look nice, but all too often it means a problem is lurking around the corner for a business. Looking at AstraZeneca ‘s 6.1% dividend yield in isolation only tells half of the story, which is why investors need to have an understanding of how the market perceives a company prior to buying a stock. We can do this by comparing a few financial multiples, like price to earnings, to its peers in the industry.

Future Growth
Up to this point, we’ve looked at AstraZeneca plc (ADR) (NYSE:AZN)’s dividend in the past, and we’ve also seen how its stock is being perceived by the market today. However, the most important factor to consider when understanding a dividend’s future is where the company’s cash flow is heading. It’s hard to generate more cash without growing sales, so let’s take a look at what industry analysts are expecting for AstraZeneca ‘s revenue growth relative to peers this year.

Foolish Bottom Line
Over the next few years AstraZeneca is facing the patent expiration of Nexium and Crestor, two drugs that alone accounted for more than 36% of last year’s revenue. That’s a serious challenge, and one that’s reflected in a discounted valuation relative to its dividend-paying peers.

I’m hopeful AstraZeneca plc (ADR) (NYSE:AZN)’s new CEO Pascal Soriot will make the right moves going forward, but, unfortunately for dividend investors, that’s unlikely to mean bigger dividend payout in the near-term. In fact, it’s quite likely that he’ll be forced to cut the dividend over the next few years unless something is done to reverse, or at least mute, the effects of these patent expirations.

The article Does AstraZeneca’s Dividend Have Room to Soar? originally appeared on Fool.com.

Brenton Flynn has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.