AstraZeneca plc (AZN): How Does It Stack Up?

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AstraZeneca plcLONDON — 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 plc (LON: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 plc (LON:AZN) 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 plc (LON:AZN) 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.

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