How Strong Are AstraZeneca plc’s Dividends?

The pharmaceuticals business is one we’d expect to throw off plenty of cash. It does cost a huge amount of money to develop a successful drug, but a blockbuster with its patent protection can be very lucrative.

So it’s not surprising to see a company like AstraZeneca (LSE: AZN) (NYSE: AZN.US) rewarding its shareholders with dividend yields of 5% and better over the past few years.

AstraZenecaPatent cliff

But when patents expire, as they have been doing for a number of key drugs over the past few years, the companies need to be sure to keep their development pipelines well stocked with replacements, and perhaps reach out for new technologies by way of acquisition.

Rival GlaxoSmithKline has been rather better at that of late, and AstraZeneca has seen earnings tumble in the past couple of years — and there are falls forecast for the next two years too.

But the dividend has been held at 280 cents per share for the past three years, and analysts are expecting the same again for this year and next. Are those dividends at risk now, and will they get moving again — and which way?

Well, AstraZeneca does seem to be on the road to recovery since new boss Pascal Soriot took over and commenced his programme of restructuring — his plan was to get the company back to its core strengths, and get that drug pipeline refilled with high-quality candidates.

Rebuilding pipeline

That’s already bearing fruit, and at first-quarter time we were told that “The AstraZeneca pipeline continues to grow and now includes 104 projects, of which 90 are in the clinical phase of development“, that “it anticipates 4 to 5 additional new molecular entity (NME) Phase III starts in 2014” and that “the late stage pipeline now includes 11 NMEs in Phase lll or under regulatory review“.

But even after that, nobody expects a return to earnings growth before 2016 at the earliest, and it’s anybody’s guess whether that will be the year. So can the dividend really be upheld?

Well, AstraZeneca’s secret is that its dividends in recent years have been very well covered. In fact, in its most recent year of earnings growth in 2011, the dividend was covered 2.6 times by earnings — there was a lot of safety built into that.

Still well covered

Even skipping to forecasts for 2015 after four years of falling earnings, we’re still looking at a dividend cover of 1.45 times — and that’s still better than GlaxoSmithKline’s cover even after AstraZeneca’s tough time.

Yes, AstraZeneca can afford to keep handing out the cash for a couple more years or so — and it should be plenty of time for earnings to start growing again.

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Alan does not own any shares in AstraZeneca or GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.