So what’s Astra Zeneca doing with all the cash they generate?

They have being buying back shares which artificially improves their earnings per share figures and increases dividend per share.  This happens because the shares bought back are cancelled, leaving more money to be shared out among the other shareholders.

Spending lots of money on drug development, but, with little success.  They just don’t have enough potential block buster drugs in late stage trials.  Astra’s drug pipeline has been put to shame by competitors like Glaxosmithkline.

Paying big dividends, which is great.

Keeping profits stashed away for future acquisitions.

How will they improve the outlook for future earnings growth?

They have been downbeat with the expectations from the current pipeline of drugs, so, one way to spend all the cash they have stashed is to buy a company that will enhance earnings.  A possible target company could be from the Biotech industry which is undergoing a revival.  For instance a company like Forest Laboratories in the USA which specialises in R&D and produces generic copies of certain drugs would be a good fit.  A purchase like this could do wonders for the share price.

All the negative news could be factored into the share price, as shown by the low PE valuation, but the news is not getting any better.  This forms the basis of Astra Zeneca becoming a value trap whereby it takes years before the company improves it’s prospects.

Revenues are expected to drop for the coming year, towards the bottom end of estimates, which will reduce profits.  This is will be already discounted in the share price.  All the negative points can be offset by the positive dividends the company pays.  Even after the projected drop in profits the dividend is still easily covered by free cash flow.

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