What Dividend Hunters Need To Know About AstraZeneca plc

Today I am looking at whether AstraZeneca (LSE: AZN) (NYSE: AZN.US) is an appealing pick for those seeking chunky dividend income.

Weak dividend prospects on offer

AstraZeneca’s share price has enjoyed stunning growth since mid-April, when rumours of a potential takeover approach from US pharma giant Pfizer first emerged. Since then the British company has rebuffed a £63bn bid, and described last week’s latest offer as ‘inadequate‘ and which significantly undervalues the company.

The story would appear to have more legs to run, and Pfizer is expected to return with another bid in the near future as the ongoing astrazenecaeffect of eroding patent protection across the industry continues to whack earnings, in turn driving M&A activity as drugs companies struggle to develop the next generation of landmark products.

AstraZeneca has been no stranger to such woes, of course, and patent loss across a variety of revenues-driving products has caused earnings to collapse in recent years — the business saw earnings drop 6% and 26% in 2012 and 2013 respectively.

Consequently, the company was forced to keep the full-year dividend on hold at 280 US cents per share. With City analysts expecting AstraZeneca to experience further earnings weakness in coming years, with 17% and 1% drops expected in 2014 and 2015, meaningful dividend growth is anticipated to remain elusive.

Indeed, the pharma giant is anticipated to shell out a dividend of 284 cents this year, up a meagre 1.4% from 2013 levels, while a 285 cent-payout in 2015 presents even-less appetising growth.

A risky income selection

Expected payouts for this year and next create a yield of 3.5%, just surpassing a forward average of 3.2% for the FTSE 100 and trumping a corresponding reading of 2.5% for the complete pharmaceuticals and biotechnology sector.

Still in my opinion AstraZeneca’s enduring earnings woes may keep dividends under the cosh for some time. As a potential dividend investor, I would be concerned by the firm’s meagre dividend coverage over the next two years, with a reading of 1.5 times prospective earnings through to end-2015 well below the widely-regarded security benchmark of 2 times or above.

AstraZeneca updated shareholders on its transformation strategy just today, advising that it expects a rejuvenated product pipeline — underpinned by the establishment of new R&D centres across Europe and the US — to drive revenues above $45bn per annum from 2023. This figure contrasts sharply from turnover of $25.7bn punched last year, levels which it is not expecting to match until 2017 at the earliest.

Until I see firm evidence of AstraZeneca turning around its ailing fortunes at the pharmacy by delivering a steady stream of sales-driving products, I believe that the firm remains a risky pick for both growth and income investors.

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Royston does not own shares in any of the companies mentioned in this article.