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AstraZeneca dividend under threat, analysts warn
AstraZeneca will need to cut its dividend because the pharmaceutical giant does not have enough cash to pay for it and will almost certainly need to raise more money if no action is taken, according to an independent analyst.
Martin Hall, of Hardman & Co, said AstraZeneca’s operational cash flow - the money it generates from daily business operations - following the expiration of patents on several top-selling drugs, notably Nexium, Losec and Seroquel.
The Anglo-Swedish firm has not had enough cash to cover its dividend payments for four or five years, according to Mr Hall: “You compensate for that by borrowing money to fund operations so you can pay your dividends.”
In March AstraZeneca raised £2.6bn through a share placing to help pay for the rights to a cancer drug being developed by Dapan’s Daiichi Sankyo, but also to repay debt and support its balance sheet.
Mr Hall said the share placing “set off alarm bells” for him. “While I have not actively followed AstraZeneca on a day-to-day basis for more than 10 years, I remember the company being cash rich and cash generative. Therefore, the need for a capital increase begged the question of where all its cash has gone,” he said.
“This cash call came just two days after AstraZeneca had paid out a substantial dividend to shareholders, and prompted me to dig a little deeper into what has been happening at the company. The placing was needed to prop up its balance sheet and provide working capital, because the company is not generating sufficient cash from operations to pay the upfront licensing fee for Daicchi, and pay off what is, essentially, a relatively modest $1bn loan,” the analyst said.
Mr Hall added: "Better planning, notably earlier cessation of share buybacks and re-basing its dividend, would have left it in a much stronger position.”
He also pointed out that AstraZeneca moved from a net cash position of $339m (£267m) in 2009 to net debt of $16.3bn at the end of the first quarter of this year. “Investors should be querying this. As a shareholder I wouldn’t want them spending millions on banking fees for share placings simply to continue to pay an uncovered dividend and make investments in other products. It’s ludicrous. The audit committee, what is it doing?”
However, AstraZeneca has been investing heavily in its drugs pipeline, notably cutting-edge cancer treatments, to rejuvenate its portfolio. In the pharmaceutical industry it takes many years and several billion pounds to develop a drug, so it can take some time before a company sees any return on its investment.
So far, AstraZeneca has seen huge clinical success with many of its new medicines, including cancer drugs that offer patients much better outcomes than existing treatments, some of which are forecast to be “blockbusters” - drugs that generate more than £1bn in annual sales.
Mr Hall believes, however, AstraZeneca will need to raise money again, unless it cuts its generous dividend payment that has proved popular with investors. “Payment of a large dividend, followed two days later by a cash call to shore up its balance sheet, at huge cost to shareholders, seems inappropriate,” he said.
AstraZeneca’s use of “core” earnings per share as its preferred measure of growth “greatly overstates true performance”, Mr Hall argued, because it included income from asset disposals but excluded items such as restructuring charges and legal costs.
“Companies never really finish restructuring and AstraZeneca has had significant restructuring every year for 10 years, so you can hardly call it a one-off,” the analyst said. “On legal costs, 15 to 20 years ago it was very rare but as generic companies became much more aggressive, suddenly these costs became quite significant. It’s just part of doing business now.”
Analysts at UBS have also highlighted that the company’s cash remains tight. “No doubt Astra has had a remarkable turnaround to an innovation driven and R&D productive organisation,” they said in a note in April.
“However with the Daiichi licensing agreement and the equity raise things have changed a bit. Without disposal gains and externalisations, AstraZeneca has had negative net cash flows in the last four years, while those externalisation revenues/disposal gains have contributed to core earnings. The equity raise that went with the licence deal is also aimed at refinancing near term debt, a reflection of ongoing limited cash generation in the near term and a sign of slow margin recovery.”
AstraZeneca declined to comment.