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This small-cap stock could be a better dividend buy than AstraZeneca plc

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After hitting an all-time high of 5,520p on 22 June, shares in pharmaceutical giant AstraZeneca (LSE: AZN) have since fallen by as much as 23%. So what made this ‘former’ dividend gem fall from grace in such a short span of time?

Major setback

Investor sentiment towards the stock took a battering after the company reported a major setback in its closely watched ‘Mystic’ clinical trial in July. Initial results from a recent global study showed that a combination of Imfinzi, its immunotherapy drug, and tremelimumab did not meet a primary endpoint of progression-free survival compared to chemotherapy in some lung cancer patients.

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The failure of its flagship lung cancer treatment means the company may struggle to meet the ambitious revenue target set by CEO Pascal Soriot at the time of Pfizer’s attempted takeover of the company back in 2014. Soriot had expected AstraZeneca to generate annual revenues of $45bn by 2023, but many analysts believe the target was predicated on the success of its ‘Mystic’ treatment.

Without major breakthroughs, the group faces falling revenues and profits amid weakening sales from older medicines and a depleting drugs pipeline. 

Not giving up

However, it’s not all doom and gloom. Soriot is not yet giving up on ‘Mystic’ — the trial will continue to assess two additional primary endpoints of overall survival, with results expected in the first half of next year. Imfinzi is also being studied in several separate trials, and the drug was recently granted “breakthrough therapy designation” by the US regulators in the hopes that it could be used by patients with non-metastatic lung cancer for whom chemotherapy had stopped working.

There’s also more to AstraZeneca’s pipeline, with new cancer drugs Lynparza and Tagrisso showing promising results.

Nevertheless, I’m still concerned about the stock’s dividend sustainability going forward as revenues continue to come under pressure against rising competition for its two best-selling blockbuster drugs, Crestor and Symbicort. As such, a turnaround in earnings may not happen quickly enough to allow the company to comfortably afford its current dividend.

AstraZeneca has kept annual dividends frozen at $2.80 per share since 2011.

A better pick?

Elsewhere, De La Rue (LSE: DLAR) seems to be on a sounder footing. The company’s recent results showed the banknote manufacturer making good progress in diversifying away from the increasingly commoditised activities of currency production.

De La Rue’s strategy to increase its presence in higher-value markets is progressing well and the company is seeing good growth in identity solutions and product authentication, two fast-growing markets in which the firm has a competitive edge in. Revenue in the year to 25 March increased by 2%, while pre-tax profits rose 6% to £58.2m.

After a big dividend cut in 2015, dividends have been kept flat at 25p per share yearly. That said, De La Rue seems to me in a better position than AstraZeneca to increase payouts once again. With expectations of bottom-line growth of 3% and 8% over the next two years, and forecast dividend cover set to rise to more than two times within two years, the firm could soon have surplus cash once big capital investments tail off.

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Jack Tang has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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