After GSK Plc, AstraZeneca Plc (“AZN”) is Britain’s second largest pharmaceutical group.
AstraZeneca was formed on 6 April 1999 through the merger of Astra AB of Sweden and Zeneca Group PLC. Earlier in 1993, ICI group demerged its pharmaceuticals business to form Zeneca Group Plc.
AstraZeneca is the world’s seventh-largest pharmaceutical company, measured by revenues and has operations in over 100 countries. AZN specialises in the development and marketing of prescription medicines to fight disease in several therapeutic area including cancer, cardiovascular, gastrointestinal, infection, neuroscience, respiratory and inflammation.
During 2005 – 2006 AZN experienced several failures of drugs in late-stage clinical trials. As a result, in 2006, following a collaborative relationship which began in 2004, AstraZeneca acquired Cambridge Antibody Technology.
This was followed, a year later, with the acquisition of American company MedImmune for about $15.2 billion, primarily for its drug-development pipeline. At the time, and since, stock analysts have criticised AZN, claiming that it paid too much.
More recently, once again, AstraZeneca is experiencing a run of failures of drugs in late-stage clinical trials, while at the same time a number of its blockbuster drugs are facing patent expiries between now and 2015, such as Seroquel and Nexium, and the loss of patent protection in the USA in 2016 for its best-selling high cholesterol treatment drug, Crestor.
Despite all this, AZN remains strongly cash-generative, thanks to the implementation of a multi-year cost cutting program in several developed markets, whilst at the same time building a prominent position in China.
Cost cutting to continue for a while
Since 2007, the group has undergone a major restructuring programme in order to reduce costs, with several research and manufacturing units closed(ing) in addition to a significant gross headcount reduction.
Having already reduced the workforce by 26 per cent since 2007, delivering $2.4bn in annual savings, AZN announced in February 2012 a further $1.6bn in annual savings by 2014 cutting a further 12 per cent of jobs. An additional 10,000 jobs may be lost by 2014
At the same time, AstraZeneca reaffirmed that it expects annual revenue will be in the $28bn to $34bn range between now and 2014, but “in the lower half of the range”. It also expects double-digit revenue growth in emerging markets.
At the end of the day it is all about increasing revenues. However, it is near impossible, for private investors, to get a ”real feel” for AZN’s drugs pipeline and the profit possibilities thereof. In fact, nobody really knows what is possible.
Nevertheless, there are some potential pipeline successes to come in 2012. Some impressive phase III data last year should underpin important product launches this/next year, like AZN’s type 2 diabetes treatment drug dapagliflozin and fostamitinib for rheumatoid arthritis.
Dividends must have been paid long enough for several cycles of share price undervalue and overvalue to be established, in order that extremes of high and low dividend yield can be observed.
The Value Table shows the dividend yields at which a company’s share price is at historic undervalue levels – low share price (LoPr) with high yield (Hyld%) – as well as at historic overvalue levels – high share price (HiPr) with low yield (Loyld%).
Share prices are Undervalued or Overvalued when they are within a ten per cent range of their historic levels of high dividend yield (Hyld%) or low dividend yield (Loyld%).
The numbers in the share price columns (LoPr and HiPr) are the equivalent share prices to the dividend yields shown in the respective undervalued and overvalued dividend yield columns.
The color coding in the Status (‘S’) column of the table indicates the current share price valuation of the company. The column will be green when the company is historically undervalued, orange when the company is historically overvalued and white when the company is trading between historically undervalued and overvalued.
Share prices are Undervalued (Green) or Overvalued (Orange) in the Yield Chart when they are within a ten per cent range of their historic levels of high or low dividend yield.
Highs (Blue) and Lows (Red) are shown based on the monthly high and low share prices.
To reduce the period under consideration drag to the right the “slider” below the chart.
From the years collated AstraZeneca has a track record of:
A long period of uninterrupted dividends will show us how companies and their management teams have performed going through several business and economic cycles.
Dividend growth is the hallmark of a high quality company. Dividends will not be maintained or raised if future earnings are in doubt.
A company that is making profitable progress should be able to boost its dividend by 7.5% or more at least five times in a 12-year period.
Compound Annual Growth Rate
For illustration purposes, we show the 5 year dividend CAGR and 12 year dividend CAGR for AstraZeneca:
Note: CAGR is a pro forma number that provides a “smoothed” annual yield, so it can give the illusion that there is a steady dividend growth rate even when the annual dividend increases can vary significantly.
CAGR is used as a measure to evaluate how well one dividend paying company performed against other dividend paying companies in the same sector.
We are particularly interested in companies with a dividend CAGR of 8 per cent or higher for both the most recent five and twelve year periods.
The Financial Strength of a company is a weighted composite score of quantitatively analysed metrics taken from the Balance Sheet, Income Statement and Cash Flow Statement.
The top score is an 8. A score of 7 and above is considered to be financially strong. A score of 5 and above is considered to be financially okay. A score of 3 and above is considered to be financially poor. A score of below 3 is considered to be a bankruptcy possibility.
While being long on AstraZeneca shares, currently, Steven Dotsch, the managing editor of Dividend Income Investor.com, does not own shares in AstraZeneca via the Dividend Income Portfolio.