AstraZeneca plc’s Dividends Are Sliding

AstraZenecaAstraZeneca (LSE: AZN) (NYSE: AZN.US) has been providing investors with attractive dividend yields for years — those blockbuster drugs do cost a lot of money to being to market, but once they’ve gained approval, they can be cash cows for years to come.

But if you’re building up a nest egg that’s intended to furnish you with a steady income not today, but in 10 or 20 years or more, what you really want to see is rising dividends, not just decent yields today.

Paying less cash

AstraZeneca has been hit by the ending of patent protection protection on a few key drugs, and falling earnings has put a stop to dividend rises. In dollar terms, we’ve had three years at 280 cents per share with the same expected again this year. But for UK investors spending their cash in sterling, the rising pound has been lowering their income.

Here’s what the past few years have looked like for AstraZeneca’s dividend in sterling terms, together with two years of forecasts:

 Year Dividend Yield Cover Rise
2010 150p 5.2% 2.63x +6.4%
2011 169p 5.6% 2.60x +12.7%
2012 182p 5.8% 2.44x +7.7%
2013 180p 4.7% 1.80x -1.1%
167p 4.1% 1.57x -7.2%
168p 4.1% 1.46x +0.6%

* forecast

On the whole, that looks like a struggling company whose dividend cover is eroding rapidly despite the yield remaining quite decent, and it’s the kind of run that should make any long-term income investor re-examine things.

When we do that, we see a company in the process of rebuilding itself. When new chief executive Pascal Soriot took over in October 2012, he embarked on a programme to return to the company’s core values of scientific leadership and rebuild its once-struggling pipeline.

Strong signs of recovery

In Q2 this year revenue rose 4%, and 3% for the half. Full-year revenue is now expected to be in line with 2013’s figure, with EPS down by a “low-to-mid single digit percentage” — and that’s an improvement on previous guidance.

The key news was of 14 projects now in Phase III, up from 8 a year previously. Mr Soriot was moved to say “We now have one of the most exciting pipelines in the industry“.

AstraZeneca is widely expected to be back to growth by 2016, although some optimists will be hoping for an upturn by the second half of 2015. I’d expect to see only modest dividend rises at best for three or four more years yet, mind — I think the company would be better retaining earnings and getting the dividend cover up. But over the next 20 years, I’d hope to see AstraZeneca’s dividends easily outstripping inflation.

Long-term cash

What this shows me is a company that keeps its dividend cover strong and focuses on the long term, and when it needs a few years of static dividends in order to refocus, it can do so — after all, a forecast 4.1% yield on today’s price of 4,190p still beats the pants off a lot of companies.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.