As anincome investor, I feel like I've hit the trifecta when I
find a low-riskstock that also has consistentdividend growth and
a fantasticyield . The high-quality dividendstocks I look for
often get little respect fromanalysts .
That is precisely the situation for one great-yielding
pharmaceutical stock in particular.Wall Street has no great
fondness for this company, whose stock trades at a
price-to-earnings (P/E ) ratio of 11, a steep discount to its
industry peers. For instance,
have P/Es of 19, 24 and 15, respectively. And this company's
current modest valuation comes on the heels of an 18%gain in its
share price in the past 12 months.
Withrevenue of $28 billion lastyear , U.K.-based
ranks among the world's top 10 pharmaceutical companies.
AstraZeneca develops treatments for a wide variety of disorders
and owns several of the world's top-selling drugs, including
Atacand for hypertension, Crestor for cholesterol and Nexium for
acid reflux. Those three blockbuster drugs accounted for $11.1
billion in revenue last year.
Some of Wall Street's criticism of this company is justified. In
the past, AstraZeneca has failed to build a new-drug pipeline of
sufficient strength tooffset revenue declines from
expiringpatents on older drugs such as Seroquel. However,
AstraZeneca isn't getting enoughcredit for what's in its current
The company has 71 drug candidates in clinical development and
another 13 that were recently approved, launched or filed for
regulatory approval. In addition, AstraZeneca is partnering with
Amgen (Nasdaq: AMGN)
, the world's largest biotechnology company, to develop new drugs
for inflammatory diseases. AstraZeneca is also collaborating with
Bristol Myers Squibb (
on new non-insulin treatments for diabetes.
A few months ago, AstraZeneca recruited a newCEO , Pascel Soriot,
from Swiss drugmaker
Roche Holdings (RHHBY)
to lead the company'sturnaround . Soriot is overseeing a
restructuring to remove layers of bureaucracy, improve
theproductivity of research and development efforts and
streamline the company's cost structure. This restructuring is
expected to yield $1.6 billion in annual savings by 2014. Going
forward, Soriot plans to supplement in-house R&D with
additional collaborations and bolt-on acquisitions.
Not every aspect of the company's story is rosy. AstraZeneca is
expecting several years of declining revenue before new products
begin to re-energize itstop line . The effect of theexpiration of
Seroquel'spatent was apparent in AstraZeneca's 2012 financial
results, as revenue fell 17% andearnings per share (EPS) declined
12%, to $6.41.
The downward trend continued in this year's first quarter.
Revenue dropped 13% from the same quarter last year, to $6.4
billion, andEPS was 25% lower at $1.41. Analysts predict
AstraZenecawill earn about $5.38 a share this year and $5.20 in
AstraZeneca expects revenue will gradually decline to $21 billion
in the next five years as the full effect of patent expirations
Despite eroding revenue, AstraZeneca continues to generate
formidablecash flow -- more than $7.6 billion in the past 12
months. That's important because dividends, acquisitions and
EPS-enhancing share repurchases are paid from cash flow, and
AstraZeneca has more than enough tofund all these strategies. The
company also has a solidbalance sheet that shows more than $8
billion incash anddebt of $10 billion, which represents only
about 25% ofcapitalization .
In addition, AstraZeneca has a stellar record for paying
dividends and a firm commitment to maintaining a progressive
dividend policy. Since 2003, the dividend has grown fourfold. The
dividend is covered more than twice byearnings , which eliminates
any threat of a dividend cut.
In fact, AstraZeneca has not cut its dividend in more than a
decade. The company aims to pay out at least half its earnings as
dividends and to increase the dividend over time. The latest
increase was 11% in March to an annualized rate of $3.80. The
forward yield on AstraZenecashares is an exceptional 7.4% -- the
best yield in the pharmaceutical sector.
At abeta of only 0.6, AstraZeneca shares are also very low risk.
(The 0.6 beta means that AstraZeneca's stock is 60% as volatile
as the overallmarket .) AstraZeneca stock is also less volatile
than the shares of its pharmaceutical industry competitors, which
have an average beta of 0.8.
Risks to Consider:
Investors should be aware ofcurrency risk . AstraZeneca pays
its dividend in British pounds, which means any increase in
theexchange rate for the dollar relative to the pound reduces
dividends for U.S. investors. There are no foreign taxissues
however, since the United Kingdom doesn't withholdtaxes on
dividends paid to U.S. residents.
Action to Take -->
At a P/E of 11, AstraZeneca shares are attractively priced for
investors who want the high profits of drug development combined
with the reduced risk of a large, diversified drug portfolio.
Income investors should like the company's track record of
dividend growth and rich yield. While AstraZeneca's return to
growth will take time, investors can collect 7% while they