The Motley Fool

Should you be buying AstraZeneca plc, Alliance Pharma plc and Dechra Pharmaceuticals plc today?

One of the major concerns of investors in AstraZeneca (LSE: AZN) in recent years has been its ability to pay dividends. That’s because it has been subjected to a patent cliff, where a number of key drugs have come off-patent and with the company failing to have ready-made replacements, AstraZeneca’s earnings have fallen heavily. As such, it cancelled its share buyback programme and there were fears that dividend cuts could be next.

However, AstraZeneca has maintained its dividends during recent years and even after four successive years of falling profitability, its dividend is still covered 1.4 times by profit. This indicates that there’s considerable headroom when making shareholder payouts and while AstraZeneca’s earnings are due to fall in each of the next two financial years, it seems likely to at least maintain dividends during that time.

Looking further ahead, AstraZeneca’s focus on acquiring new drugs and developing new treatments is likely to pay off over the medium-to-long term. This should ensure a rising dividend in future, with AstraZeneca’s yield of 4.9% making it a sound buy in the meantime.

Brand expansion

Also offering upbeat long-term prospects is Alliance Pharma (LSE: APH). It has an excellent track record of making acquisitions and successfully diversifying its product offering. And with it having purchased the healthcare products business from Sinclair IS Pharma recently, it has become a much bigger player within the healthcare space. Importantly, the £132m deal immediately widens Alliance Pharma’s geographical reach as well as adding 27 products including five key growth brands to its offering.

With Alliance Pharma forecast to increase its bottom line by 8% this year and by a further 9% next year, it appears to have upbeat growth prospects. And with its shares trading on a price-to-earnings (P/E) ratio of just 11.3, they offer significant upward rerating potential. That’s especially the case since investors remain uncertain at the moment regarding the macroeconomic outlook, so less cyclical companies such as Alliance Pharma could become increasingly popular over the medium term, thereby leading to a higher share price.

Growth prospects

Meanwhile, Dechra Pharmaceuticals (LSE: DPH) also has upbeat growth prospects. In the current year its bottom line is forecast to rise by 6%, while growth of 18% is pencilled-in for next year. Although Dechra has a rather rich P/E ratio of 26, when this is combined with its growth rate it equates to a relatively appealing price-to-earnings growth (PEG) ratio of 1.4. This indicates that its shares offer good value for money and could be set to continue their 128% rise of the last five years.

While Dechra currently yields just 1.7%, it has a payout ratio of only 43%. This indicates that dividends have the capacity to rise at a brisk pace – especially when Dechra’s earnings growth forecasts are so positive. As such, it seems to be a sound long-term buy.

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Peter Stephens owns shares of Alliance Pharma and AstraZeneca. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.