1.5 Reasons Why AstraZeneca plc Is A Perilous Income Pick

In this article I am looking at why I believe AstraZeneca (LSE: AZN) (NYSE: AZN.US) is a shaky selection for those seeking reliable dividend prospects.

Diddly dividend coverage casts a heavy cloud

AstraZeneca has been a high-risk stock pick for some time, as loss of exclusivity across key products and a bare pipeline for the next couple of years at least is likely to keep earnings underwater. So although City analysts expect the business to resume dividend growth from this year, with dividend coverage of just 1.5 times prospective earnings through to the end of 2015 I believe the firm’s payout prospects are on extremely thin ice.

The pharma play is expected to push the full-year dividend higher this year and next, with a payment of 280 cents in 2013 expected to rise to Cash286 cents this year and 288 cents in 2015.

Still earnings declines to the tune of 14% and 3% in 2014 and 2015 respectively, to 433 US cents and 420 cents, cast doubts over whether the firm will be in a position to raise the dividend. Indeed, a backdrop of persistent earnings pressure has forced the firm to keep the payment fixed for the past two years, so further payment stagnation cannot be ruled out.

At face value, a handy improvement to the firm’s capital position — operating cash flows rose to $7.4bn last year from $6.9bn in the prior 12 months — should shore up investor confidence in the firm’s dividend outlook.

But the cash-intensive nature of R&D across the pharma space, combined with AstraZeneca’s extensive restructuring and lab-building programme in place set to continue during the next few years, is likely to put a strain on the firm’s balance sheet and potentially hamper payout growth.

And the company’s dividend yields for this year and next can hardly be described as trailblazing, with a readout of 3.8% for both 2014 and 2015. Although comfortably above the FTSE 100 forward average of 3.2%, this figure is made to look ordinary when tallied up against a corresponding reading of 5.2% for industry rival GlaxoSmithKline.

For more optimistic stock selectors, AstraZeneca’s expected earnings improvement this year and next — the drugs giant saw earnings plummet 26% last year by comparison — could be viewed as a momentous event for the firm’s long-term growth and income prospects, as the effect of patent expiration across key products becomes less problematic for the bottom line.

But considering the firm’s fragile dividend coverage, I believe that at present the risks for income investors outweigh the potential for bountiful rewards.

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> Royston does not own shares in AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.