Dividend policy: AstraZeneca pays a dividend twice a year which it intends to grow or maintain in line with earnings.
Yield: 4.3 per cent
Payment: Half-yearly, declared in US dollars
Last cut: Between 1999 and 2012, AstraZeneca paid gradually increasing dividends. Since then the payout has remained level at 280ȼ a share
For much of its existence AstraZeneca (AZN), like its larger peer GlaxoSmithKline (GSK), has enjoyed the predictable cash flows of a big pharmaceutical company. This allowed it to return generous dividends to shareholders, which grew in line with earnings until 2011. Even in years when operating profit was knocked by falling sales of certain blockbuster drugs, Astra’s excellent free cash flow gave management the confidence to keep the dividend ticking up.
But more recently Astra lost patent protection on a number of former top-selling drugs, which caused revenue to sink. The subsequent fall in earnings has been so stark that the dividend – which has been kept flat at 280¢ (217p) for the past four years – has not been covered by basic earnings (compared with GSK, it has had far fewer adjustments) since 2012. Before then it had consistently enjoyed no less than two times earnings coverage.
Arguably, however, Astra could have seen its current predicament coming. In 2011 three of the group’s drugs contributed more than a quarter of the overall $3.6bn top line, while newly launched drugs only generated $0.2bn. Within five years all three of those drugs – and another six – had lost their patent protection.
With revenue from former top-selling medicines suffering a dramatic drop and no new drugs ready to take up the flack, Astra’s net profits fell from a peak of $10bn in 2011 to a low of $1.24bn just three years later. As a result, the group’s payout ratio (dividends as a proportion of earnings) has exceeded 100 per cent for the past four years and the dividend has not been covered by free cash flow for the past two.
On the face of it, things look bad for AstraZeneca’s dividend. In fact, a number of fund managers and analysts have predicted that the company will soon be forced to cut its dividend for the first time in its 18-year history. And yet AstraZeneca has a few tricks up its sleeve which – if successful – could turn the fortunes of the company around and dispel these concerns.
Most notably, its pipeline of new drugs has improved beyond recognition. In 2014 – following the aggressive takeover approach by US competitor Pfizer (PFE) – management decided to ramp up its investment in new drugs. That year, core research and development investment rose 16 per cent to $4.9bn, or close to a fifth of the top line.
Astra has since deployed some of its considerable cash supply into the acquisition of businesses with impressive pipelines and particular specialism in oncology. The combination of that increased investment and acquisitions has left Astra’s pipeline of new drugs one of the best in the world. Fourteen drugs trials are due to announce final-phase data in 2017 and another 12 the year after. Plus, the wider pipeline comprises 78 early-stage clinical trials. Analysts at Liberum think that, at their peak, just four of these drugs could generate a total of $8bn – more than a third of the group’s total 2016 revenue.
More recently, as the drain of extensive investment has started to take its toll, Astra has decided to sell off some lossmaking assets that it deems non-core in a bid to keep operating profits afloat. The so-called ‘externalisation revenue’ is not nearly as cash-generative as that from actual drug sales, so lower levels of cash generated from operations coupled with a few years of high capital expenditure has had a predictable effect on free cash flow. Still, Astra has kept the dividend stable while the group progresses its pipeline. Operating profit should become much less reliant on these sales if even one of the group’s pipeline of new drugs hits the mark.
