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AstraZeneca plc: Why $4.20 Is The Magic Number

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Executive compensation plans have always drawn shareholders criticism but AstraZeneca’s (LSE: AZN) (NYSE: AZN.US) ‘Azip’ plan has been designed with shareholders in mind. 

Azip was put together in order to safeguard Astra’s dividend payout to investors, as well as encouraging the company’s management to grow the payout at a sustainable rate and grow earnings per share.  

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The criteria are simple. In order for the Azip plan to remain in effect, the dividend must not be cut and earnings per share must not fall below 1.5 times the dividend. If either of these targets are not met, then benefits are forfeited. Astra’s CEO, Pascal Soriot, stands to lose a bonus of 89,960 shares, roughly £4.1m worth of stock if the company fails to maintain these standards. 

 So, there’s a lot at stake but why is $4.20 such an important number?

The magic number 

The Azip plan states that Astra’s dividend must be covered one-and-a-half times by earnings per share. For the last three years Astra has paid out a dividend per share of $2.80. Multiply $2.80 by 1.5 and you get $4.20. 

What’s more, as part of the Azip plan, Astra cannot cut the dividend. With this being the case, the payout cannot be lowered in order to maintain cover of one-and-a-half times.

So overall, Astra’s earnings per share must stay above the key $4.20 level. At this level the payout is covered one-and-a-half times and rewards promised under the Azip plan are safe. However, if Astra cuts its dividend to save cash, or the company’s earnings per share fall below $4.20, then awards promised under the Azip plan are forfeit. 

Full steam ahead

Unfortunately, Astra’s management are running out of time to ensure that they meet the Azip criteria. Indeed, as Astra struggles with falling sales of its key products, earnings have been falling over the past five years. Full-year 2013 earnings per share were $5.05, down from $7.28 as reported for full-year 2011.

Moreover, within the group’s recently published third-quarter earnings announcement, management revealed that full-year 2014 earnings would be 15% lower than those reported for 2013, in part because of the stronger dollar. According to my figures, these forecasts suggest that Astra is set to report earnings per share of $4.29 for 2014, only just above the key $4.20 threshold. 

And with that key $4.20 threshold looming, Astra’s management have picked up the pace driving multiple deals through over the past month alone.

For example, since the beginning of October the company has revived the go-ahead from regulators for the development of several new, key drugs. An asset swap with peer Almirall has also been completed and Astra’s global biologics research and development arm, MedImmune, has entered into an agreement to acquire Definiens, a world-leading medical data analysis technology firm. 

Astra’s management knows that they stand to lose a lot if the dividend payout comes under pressure, so they’re working hard to ensure that the company returns to growth.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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