It’s been two momentous months as far as Covid-19 vaccines go.
In late November, AstraZeneca (LSE:AZN) released interim data on its Covid-19 vaccine candidate, which showed around 70% average efficacy. Excitingly, one of the company’s dosing regimens could be up to 90% effective. However, more data is needed to confirm these findings.
In December, both the US and the UK approved Pfizer/BioNTech’s vaccine that’s around 95% effective.
Given that the Covid-19 vaccine market will be huge, here’s what I think AstraZeneca’s vaccine candidate means for the dividend.
Short-term financial impact
The financial impact of AstraZeneca’s vaccine candidate for Covid-19 in the short term is uncertain in my view. First AZN’s vaccine candidate hasn’t been approved yet.
Second, AstraZeneca has said it doesn’t intend to profit from its Covid-19 vaccine, currently named AZD1222, “during the pandemic“. Management defines this as ending at the start of July 2021. Although management could always extend the pandemic period in their definition, there’s a possibility they won’t.
When the ‘pandemic period’ ends, it’s not clear how well the vaccine could do in the developed world. There could be a lot of competition. Given the wide difference between the average efficacy of AZD1222 and the higher efficacy of one dosing batch, there’s still a lot of uncertainty. If AZD1222’s efficacy isn’t as great, demand might not be as strong. If that’s the case, I don’t believe AZN will make a lot of money from the vaccine in the developed world.
Given that I don’t think the vaccine will meaningfully affect AZN’s earnings in the short term, I don’t think it will affect the company’s dividend much either.
Where I think the dividend might go
As for where I think the dividend will go in the next year or two, I think management will probably continue paying the same annual dividend. I think this because AZN management has paid the same annual dividend of $2.8 per share from 2015 to 2019.
I think management might also have to save some money for the cash component of the recent Alexion deal.
If the deal goes through, AZN has agreed to pay around $39bn for the company, with Alexion shareholders getting $60 in cash per share in addition to some AZN stock. Due to the deal, strengthening the balance sheet could be a bigger priority than increasing the dividend in my view.
Before the deal, management expected FY 2020 core earnings to increase by a decent amount in constant currency terms.
Is the stock a buy?
Although it might not matter much in the short term, I think the vaccine, if approved, could help AZN considerably in the long term by increasing goodwill in developing markets. With more goodwill, I reckon there is potential for higher earnings from developing markets and more dividends in the long term.
Given the potential for quantum computers and AI to unlock many advances, I am bullish on big pharma in general in the long run. Although the stock fell on the news, I also think AZN’s recent deal with Alexion could pay off in the long run given tech advances. Given that AstraZeneca is a leading big pharma company, I’d buy and hold the stock.
