Is Astrazeneca a slow motion train wreck?

Astrazeneca has been on the ISA challenge watchlist for a while.  Measured on a price earnings (PE) basis it’s cheap, really cheap.  This share is exciting because of it’s juicy dividend, which helps qualify it as a stock worthy of investing in an ISA.  Astra is a large cap stock with lots of block busting drugs on sale, developed markets, expansion in developing markets and well covered dividends.  All reasons that make it an attractive addition to an ISA.

All well said and done, but, not everything is rosy at Astrazeneca.  Shares that offer high yields can often be a indicator that the company is in trouble.  A dividend yield is a historic measurement and there is every chance that the company will cut the dividend if the profits are not there to back it.  For that matter the PE ratio is also a historic measure.

Astra’s chief, David Brennan, has decided to retire early as profits slide 38%.  Now that’s a big slide.  Top management seem to have been sleep walking head long into the companies looming patent cliff.  As profits drop the PE will rise making the share not look so undervalued.

In the last piece about Astrazeneca the conclusion was to keep an eye on the company.  Here’ s some findings.  The company makes lots of money but they have been artificially enhancing their earnings figures by buying shares and cancelling them.  So the earnings are divided up by a lower number of shares which increases the earnings per share (EPS) ratio.

The big question overhanging the share is, will Astrazeneca cut it’s dividend?

The yield alone makes Astrazeneca and interesting target.  If the price suffers short term the divi payments make it worthy of consideration for an ISA or any investment.  Let’s face it, where are you going to get a return on your money of over 6% easily.

YES – the dividend will be cut

  • Analysts expect Astra’s sales to decline over the next 5 years.
  • Exclusivity on drug sales are due to expire over the coming years which will lead to further falls in profits.
  • Few potential block buster drugs in development.

NO – it won’t

  • Sales declines will not be large enough to threaten the dividend pay out.
  • No announcement has been made that they will reverse the decision to increase dividends.
  • Dividend cover is still maintained at two times (profits cover dividends twice over).
  • The management shake up will help the company secure new deals and diversification that they have been lacking.
  • Expect acquisitions and deals to remove the company’s reliance on generating new drugs.

More points in no it won’t than yes it will.  As always do your own research before buying any shares in this company or any other.   This article at seekingalpha was particularly helpful in this decision making process.  As mentioned in the article the shares are reaching historically low valuations based on some valuation methodologies.

Disclosure I am leaning towards buying shares in this company now, but, cautiously.  The online broker I use allows regular investments with very low dealing fees that can be made automatically.  I will be watching closely and setting up a direct debit to invest regular amounts which will allow me to benefit from ‘pound cost averaging’.

What’s more markets tend to value company prospects two or more years out.  The loss of earnings from block buster drugs that are loosing their patents should already be reflected in the valuation.

Also Astrazeneca has been laying down roots in China.  China has a burgeoning middle class population which will help the pharmaceuticals industry explode of the coming years.


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