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AstraZeneca pay out looks well protected

The UK's largest listed company's yield is down from its peak. But on balance, that looks a positive sign for long-term investors.
AstraZeneca pay out looks well protected

It is impossible to say how long the world will need Covid-19 vaccines. The course of the pandemic never did run smooth. Will we require boosters every year? Will new variants mean that new jabs will be under constant development? To echo a much-used phrase from the last 18 months, only time will tell.

Yet AstraZeneca’s (AZN) Covid inoculation is just one small piece of its overall revenue pie. True, the FTSE 100 pharmaceutical giant worked tirelessly alongside Oxford University to roll out a coronavirus vaccine at lightning speed last year. But Astra does not expect to profit from said vaccine during the emergency phase of the crisis. Neither has it factored its jab into sales forecasts.

Moreover, vaccines have not historically been Astra’s real forte. Rather, they are a specialism usually associated with the UK’s other big pharma company – GlaxoSmithKline (GSK). Astra’s known areas of expertise are oncology, as well as cardiovascular, metabolic and respiratory disease.

On these fronts, the group has remained a dominant global force. Indeed, since current chief executive Pascal Soriot took the reins in 2012, Astra has focused intently on scientific leadership and a return to growth – transforming itself in the process into a mega £130bn company.

For the three years ending December 2020, group revenues rose at a compound annual rate of 5.8 per cent to reach $26.6bn. Almost $11bn of that figure could be attributed to cancer drug sales, and more than half of the top line came from the sale of new medicines – suggesting Astra’s drug pipeline activity is bearing fruit.

Drugs are essential to our everyday lives. That point on its own lends weight to the idea of pharma companies being steady income stocks. Major demographic shifts including ageing populations and a rising prevalence of chronic illness mean that demand for medication is only increasing.

But pharma is also vast and highly competitive. And while its contestants are protected by legally binding patents, these don’t last forever. Intellectual property rights eventually expire, opening the doors to companies that can make cheaper, generic drug alternatives.

It follows that AstraZeneca needs to continue investing in its future growth – expanding the potential applications of its existing medicine cabinet while working on new ideas.

Research and development (R&D) is therefore a major draw on cash flows, and cost roughly $6bn in each of the last three years, equivalent to more than a fifth of revenues. It’s a risky game: just one in 10 drugs generally makes it through clinical trials.

That need to invest with no guarantee of success is a major factor for investors to consider when weighing up the dividend case. The group says itself that “cash generation is a key driver of long-term shareholder returns” but that it also “facilitates reinvestment in our pipeline, which is critical for delivering new medicines and future value”. Like its peers, Astra must strike a fine balance between cash returns and bolstering its portfolio.

Free cash flow (FCF) stood at $3.9bn in 2020 and analysts expect that figure to rise to $7.7bn by 2022, or 733¢ per share. Cash generated within Alexion, the biotech company it bought for $39bn earlier this year, should help.

With sales expected to hit $40.5bn in 2022, brokers are projecting EPS of 543¢, easily covering an anticipated pay-out of 289¢ a share.

In all, AstraZeneca’s dividend looks well-underpinned for now – and as we have noted before, a PEG (PE/growth) multiple of 0.8 suggests the shares could be undervalued.

 

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