I recently made a trip to my local GP. I was suffering from a common skin infection. Three trips later, and after I had purchased multiple creams and ointments, the infection began to clear. Each time I went back to the pharmacy and stood in the long queue, I thought, this is a gold mine. And, essentially, it is.
Us humans are very protective of our bodies in the 21st century and there seems to be a cream or tablet for just about everything. AstraZeneca (LSE: AZN) (NYSE: AZN.US) is one of the worlds largest pharmaceutical companies. Its produced some valuable products over the years, and that (if all goes well) looks set to continue. From a business perspective, its got plenty of challenges but it does look like the worst days are behind this drugs giant. And if you dont believe me, take it from the man at the top, Pascal Soriot, who recently declared significant progress in the companys turnaround efforts. Pfizer is also acutely aware of the companys long-term value. Last May it made an unsuccessful 69.4 billion takeover bid for the drugs maker.
So whats all the fuss about?
Recently, AstraZeneca reported second-quarter earnings that beat analysts forecasts, with a net profit margin just north of 12%. The company said surging sales in China contributed to the result. Moreover, the drugs maker says it sees continued double digit growth in emerging markets. And it seems that the 4% revenue growth achieved in the second quarter has, at least for the moment, halted a long-termdecline in sales. AstraZeneca is now looking at around 13% growth in earnings per share.
So can shareholders expect to receive a bigger dividend cheque in the mail? Analysts think not. At least 30 analysts covering the company expect the companys dividend policy to remain unchanged this year.
Lets just do a quick stop-and-check. AstraZeneca is in good shape but its clear its not resting on its laurels. Its being conservative with its capital management. I suspect that will be until its once again in a winning position with its patents. From that perspective, its current valuation doesnt look so unusual. Its forward P/E ratio of 10.8, for instance, compares well againstGlaxoSmithKlines 15. AstraZeneca wont be shooting the lights out in the short term, but it has outlined a clear strategy to return the business to profit growth.
In the pipeline
There are some tangible projects for investors to get excited about.
The companys set to join forces with Eli Lilly in developing and commercialising its candidate BACE inhibitor (aimed at stopping the degeneration of neurons in Alzheimers disease). The deal could be worth up to $500 million for the company
AstraZeneca is also working on immunotherapy drugs seen as a crucial part of the drug makers longer-term success.
Watch this space
All drugs makers have to deal with patents running out and AstraZeneca is no exception. Its certainly recently caused a few headaches for the business. Indeed, analysts warn that more challenges lay ahead for the company as more key products lose patent protection. Thats why the projects the company is currently working on are so important. Mind you all of this is a perfectly normal part of being a pharmaceuticals company.
Also important to know is that Pfizer will be allowed to make a fresh bid for AstraZeneca at the end of the year. If its seen as a credible bid, the share price will appreciate up to that point.
From my perspective AstraZeneca ticks the dividend box, the short-term capital gain box and potentially (assuming it continues to invest in its business) the longer-term play box.
AstraZeneca’s treated its investors with a degree of generosity in the past with regard to its dividend. For now it’s stopped appreciating given the drug maker’s projected earnings forecast but there’s no indication it will be cut. That’s partly because the company’s longer-term financial forecasts (stretching out to 2017), seem to roughly support its current dividend policy.
These are the sorts of things you need to consider when you’re choosing a company to invest in — especially if you’re chasing dividends. Also, what does management have to say? What sort of track record does the company have? For more on the great dividend chase, and buying companies that will really take care of you, check out this FREE report, How To Create Dividends For Life. It’s got everything you could ever want to know about picking the right sorts of companies to create a dividend-rich stock portfolio.
David Taylor has no position in any shares mentioned. The Motley Fool UK has recommended shares in GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
