Today I am looking at why AstraZeneca (LSE: AZN) (NYSE: AZN.US) could prove a lucrative income pick.
Dividend yields smash the competition
A backdrop of heavy earnings pressure in recent has forced pharma giant AstraZeneca to put the skids on progressive payouts in recent times. Indeed, the firm has kept the full-year payout locked at 280 cents (US) per share for each of the past three years.
And with further growth issues on the cards — City analysts expect ongoing revenues constraints to prompt earnings dips of 13% and 2% in 2014 and 2015 respectively — AstraZeneca is expected to keep the payout on hold through to the end of this period.
Still, predicted dividends for this year and next still create juicy yields of 3.9%, surpassing a prospective average of 3.2% for the FTSE 100 and soaring above a corresponding readout of 2.6% for the complete pharmaceuticals and biotechnology sector.
Perky prospects from the pipeline
Theoretically, however, AstraZeneca could struggle to even keep dividends flat during this period given the ongoing crippling effect of patent expirations on sales. Indeed, estimated payments through to the end of next year are covered just 1.5 times by earnings, well below the generally-regarded security watermark of 2 times.
And AstraZeneca’s need to chuck vast sums at organic research and development, not to mention its ambitious restructuring programme and acquisition drive, to deliver the next generation of earnings-driving products is also proving a drain on company cash flows amid toiling profits. Indeed, free cash flow slumped to $3.3bn during the first half from $3.8bn in the corresponding 2013 period.
At face value, AstraZeneca’s latest financial results in July indicate that the firm is on the cusp of a turnaround as its portfolio of industry-leading drugs delivers the goods. Group turnover edged 4% during April–June to $6.5bn, marking the second successive quarter of sales growth and driven by stunning sales growth amongst its Bydureon diabetes and Brilinta cardiovascular drugs.
The long shadow of patent losses
However, the prospect of further patent losses in the near future — particularly for its Crestor anti-cholesterol product and Nexium heartburn treatment — continues to cast a shadow over the firm’s sales outlook. Combined, these two products alone account for around 43% of group turnover.
Still, the firm’s meaty cash pile should prove substantial enough to assuage investor fears over dividend projections in the medium-term, while the firm’s improving pipeline may mitigate fears over future payout growth.
AstraZeneca currently boasts 14 drugs in late stage development, and although the convoluted nature of drugs testing means that neither earnings nor dividend growth can be guaranteed, AstraZeneca’s payout prospects could get a significant shot in the arm should the pipeline strike gold.
