The Reasons AstraZeneca plc Won’t Make You Wealthy

AZNIt’s been a rollercoaster period for FTSE 100 shares. Earlier this week the index tumbled a massive 127 points and, while investors should focus not on what the market does day to day but rather look at the long term trend — which is always up, as history has shown us — it’s still never exactly fun seeing the majority of your holdings in the red.

Shares in companies like AstraZeneca (LSE: AZN) (NYSE: AZN.US) will continue to perform well regardless of economic conditions. These types of companies are called defensives because the needs they serve don’t ever go out of fashion. A cyclical company, on the other hand, ebbs and flows with the economic cycle.

It’s a smart strategy to base your portfolio around some core defensive stocks. I’ll be looking at whether AstraZeneca is a good bet for such a position among your holdings:

Not a star income performer

One such quality of a defensive share is a solid dividend. Studies have shown that high yielding shares easily outperform the market in the long run.

AstraZeneca’s full-year dividend for 2013 came in at 175p per share, which means it provides an income of around 4.5%. That’s high — the FTSE 100 average dividend yield is 3%.

The problem with AstraZeneca’s dividend is that since 2011 it has been broadly flat. Not only that, the dividend cover for 2015 is 1.6 times prospective earnings, while typically an income minded investor would like to see coverage of around twice earnings.

So far, the pharmaceuticals giant isn’t looking like a sure thing for a ‘core’ position in your portfolio. But let’s look further.

Profitability is still declining

The pharmaceuticals industry has taken a battering from low cost, generic competition to some of the best selling drugs of yesteryear. The way to combat this is to come up with new medicines that are covered by fresh patents, but R&D comes at a price, and it isn’t cheap.

AstraZeneca has made diabetes treatment a priority and invested $4bn to take control of Bristol-Myers Squibb’s interests in the firm’s diabetes alliance.

While this is a positive step, the company is lagging behind rival GlaxoSmithKline in this regard, who had five drugs approved by the regulator last year. By comparison, none of AstraZeneca’s treatments in phase III trials will apply for regulatory approval before 2016.

Before then, profits will continue to hurt. In 2013 profit slumped over 50% to $3.3bn with core earnings per share set to decline somewhere in the teens over the coming year.

Does it make a good ‘core’ share?

As far as being a core share goes I don’t really like like AstraZeneca. It’s dividend isn’t growing and it doesn’t have terrific cover. I wouldn’t proclaim a dividend cut is likely anytime soon, but there are probably better options elsewhere in the market, that are nonetheless safer in that regard.

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Mark does not own shares in AstraZeneca.