TipRanks Smart Dividend Newsletter – Edition #28
Hello and welcome to the 28th edition of TipRanks’ Smart Dividend – a weekly Newsletter providing you with investment ideas for safe-bet quality stocks that are outstanding dividend payers, compared to their peers.
Today’s dividend stock recommendation is a pharmaceutical giant with stellar finances and profitability, ranking high on both dividend and growth metrics.
Investment Thesis: Healthy Treats
In the past decade, the pharmaceutical industry has quietly but steadily advanced, adapting to new health challenges and technological breakthroughs. With a global market value exceeding $1.5 trillion, this sector demonstrates a consistent and reliable growth pattern, underpinned by secular trends such as an aging population and a rising focus on health and wellness, as well as by accelerating the advancement of science and technology.
The industry’s growth is propelled by continuous research and development efforts. These investments are essential for meeting the ever-evolving healthcare needs and maintaining a pipeline of innovative treatments. Key areas such as oncology, cardiovascular diseases, and immunology are not just medical priorities but also represent significant market opportunities, marked by steady demand and potential for advancement. Additionally, the expansion into fields like gene technologies and neuroscience promises to unlock new horizons in treatment possibilities.
The integration of emerging technologies like artificial intelligence in drug development is a quiet revolution, enhancing efficiency and precision in pharmaceutical research.
For investors, the pharmaceutical sector offers a stable landscape with long-term growth potential. The industry’s consistent focus on innovation, combined with sound financial health and strategic expansion, makes it a compelling choice for those seeking reliable growth and value. It stands as a key area for investors who value consistent performance and long-term growth potential, coupled with the sector’s crucial role in global health and well-being.
Quality Dividend Stock: This Week’s Top Pick
AstraZeneca Plc (AZN) is a multinational pharmaceutical and biotechnology company, the world’s ninth-largest drugmaker by revenue, and eighth-largest by market capitalization.
AstraZeneca is traded on the London, Stockholm, and NASDAQ exchanges. The symbol is AZN in all three markets.
AstraZeneca was established in 1999 through the merger of the Swedish Astra AB, founded in 1913, and the British Zeneca Group, founded in 1993. From its formation, AZN focused on five main areas of research: cardiovascular, gastrointestinal, respiratory, oncology, and local and general anesthesia. These remain high in its core focus today, even as the company has grown and expanded its product suite via heavy investment into research and development (R&D), as well as strategic acquisitions.
Today, AZN commands a market capitalization of almost $200 billion and has a workforce of 83,500 employees in over 100 countries around the world. The company’s headquarters are located in Cambridge, United Kingdom, and an active R&D presence in more than 60 countries across the globe. Its main R&D facilities are in the U.K., the U.S., Sweden, and Poland.
In 2022, almost a quarter of AZN’s total revenue was expended on R&D. The company is among the world’s top six pharma companies ranked by the number of drugs they had under development. AstraZeneca has three therapy-focused R&D divisions, each focused on its field and responsible for the end-to-end process, from discovery through to late-stage development.
These segments are Oncology R&D, focused on cancer; BioPharmaceuticals R&D focused on cardiovascular, renal, and metabolism (CVRM), respiratory and immunology, vaccines and immune therapies, as well as neuroscience; and Rare Disease R&D, focused on rare diseases across multiple therapy areas.
AstraZeneca has one of the world’s most extensive treatment pipelines, with 167 projects in varied stages of clinical development, including new molecular entities in late-stage development or under review. The company constantly invests in cutting-edge science and technologies to fast-forward drug discovery. Thus, AZN leverages advanced medical science in the fields of cell-based therapy, antibody therapeutics, and nucleotide-based therapeutics, as well as technological developments such as data science and artificial intelligence (AI).
AZN’s scientists work in collaboration with others in dedicated laboratories in universities and research institutions; the company also has established an oncology treatment development initiative along with seven of the world’s leading oncology medical centers. Furthermore, the company launched an Open Innovation program in 2014, offering a permeable research environment where scientists both inside and outside of AstraZeneca can share their ideas and collaborate on projects.
As of today, AstraZeneca’s main therapy areas include treatments for oncology, CVRM, respiratory, and immunology. Another major field is vaccine and immune therapies research and development; the company was one of the few global drugmakers to rise to the challenge of mass-producing a Covid-19 vaccine during the pandemic.
In addition, with the acquisition of a U.S. pharma company Alexion in 2021, AZN considerably expanded and diversified its immunology medicine and rare disease treatment portfolio, becoming one of the major drugmakers in these fields. Alexion was purchased for $39 billion. The acquisition was more than successful, as it helped the company reach its ambitious goal of expanding its annual revenue to $40 billion (from roughly $26 billion it made in 2020). Moreover, the target, which was slated to be reached in 2023, was instead surpassed one year earlier, as in 2022 the company took in a revenue of $44.4 billion.
Besides the Alexion buyout, the company has made 15 acquisitions of companies around the world in the fields of biopharmaceuticals, life sciences, and oncology. Its most notable recent acquisitions include a U.S.-based biotechnology firm TeneoTwo, Inc., and a Dutch oncology cell-based treatment developer Neogene Therapeutics in 2022, as well as a U.S.-based clinical-stage biopharmaceutical company CinCor Pharma in 2023.
According to the company’s management, AZN continues to look to expand its scope through acquisitions, in addition to its focus on internal research and development efforts. However, there is no immediate necessity for AstraZeneca to pursue acquisitions since the majority of its leading medicines will lose their patent exclusivity after at least eight years.
The global pharmaceutical industry has seen significant growth during the past two decades, with total revenues reaching $1.5 trillion in 2022. In 2023, the pharma sector’s revenues as a whole continued to be driven by strong growth in oncology, immunology, and infectious disease treatments, with cardiovascular and neurology drugs also showcasing impressive revenue growth. AstraZeneca maintains a robust presence in most of the leading growth areas; in oncology, it holds a second position after Merck (DE:MRK), while in cardiovascular treatments it has second place after Bristol-Myers Squibb (BMY).
According to Fitch Ratings, in the medium term, the global pharmaceutical industry growth will continue to be driven by innovation efforts as well as M&A activity. Fitch sees the greatest revenue growth potential in oncology, neuroscience, and gene technologies, which “offer real treatment innovation and, therefore, pricing power for the industry.”
The world’s largest and most lucrative pharma markets are North America and Europe, expected to lead the revenue growth in the foreseeable future, although emerging markets are also seeing accelerated growth in recent years. The U.S. is the largest pharmaceutical market in the world, making up over 42% of the total global pharmaceutical spending; China is the second-largest single-country market, representing almost 8% of global sales.
AZN’s revenue sources are diversified across its areas of expertise, geography, and top-grossing names. Thus, in 2022, 35% of total revenues was derived from oncology treatments; 21% from CVRM medicines; 16% from rare disease pharmaceuticals; 13% from respiratory and immunology treatments; 11% from vaccines and immune therapies; and 4% from other treatments, mainly anti-reflux drug Nexium, one of AZN’s most commercially successful medications.
The top ten of AZN’s treatments by revenue volumes are Tagrisso (oncology), Farxiga (CVRM), Soliris (rare diseases), Imfinzi (oncology), Lynparza (oncology), Symbicort (respiratory and immunology), Evusheld (vaccines and immune therapies), Calquence (oncology), Ultomiris (rare diseases), and Vaxzevria (vaccines and immune therapies).
As for the geographical diversification, AstraZeneca derives 40% of its revenues from the U.S.; 19% are sourced from Europe; 12% come from other developed markets; and 25% from emerging markets, including 13% from China.
AstraZeneca’s financial health is robust. Although its net debt-to-equity ratio is medium-high at 63%, higher debt levels are normal in the pharma industry, characterized by heavy R&D expenditures and high-volume M&A activity. Thus, the company took on significant debt to acquire Alexion but has since reduced it and continues to pay down that debt. AZN’s debt is well-covered by operating cash flow, while the interest on its debt is covered by EBIT many times over. AZN’s debt is highly rated by major rating agencies: “A” at S&P Ratings, “A2” at Moody’s, and “A-” at Fitch, representing the top level of the ratings scope.
AZN’s capital efficiency ratios compare favorably to the industry averages. Thus, its Return on Equity (ROE) of 16.3% may seem mediocre, however, it’s ranked in the top 15% of its industry. Meanwhile, the company’s Return on Assets (ROA) of 7.0% and Return on Invested Capital (ROIC) of 9% are much higher than the industry averages.
AstraZeneca’s robust profitability is reflected in its margins: its gross margin of 89.2% beats all its major competitors by a wide margin, while its operating margin of 31.2%, net profit margin of 13.1%, and FCF margin of 20.6% are among the highest in the Pharmaceuticals industry.
In the past three years, the company has been growing revenues at a CAGR of 20%, and earnings-per-share at a CAGR of 26%. In the past year, AstraZeneca’s earnings-per-share surged 188%, thanks to the successful incorporation of the acquired companies’ products, as well as to AZN’s key blockbuster drugs.
On November 9th, AZN reported its Q3 2023 results, featuring an eighth consecutive quarter of EPS beat. In the quarter, the company succeeded in growing its revenue by 6% year-over-year despite the significant decline in sales of Covid-19 vaccines (excluding those, revenue jumped 13%). Three-quarter revenue growth in 2023 stood at 5% (15% excluding Covid-19 vaccines), also featuring higher gross margins due to a declining share of low-margin Covid vaccines in the revenue mix. Revenue growth in the recent quarter was led by several new and existing treatments, such as Imfinzi, with sales growth of 53% year-on-year, and Farxiga, with sales up 41%. Some of the company’s newer drugs have seen triple-digit growth; for example, sales of cancer treatment Enhertu surged 146% year-on-year.
Following the past quarter’s success, the company’s management raised its financial guidance for the full year 2023. Total revenue excluding Covid-19 vaccines is now expected to rise by a low-teens percentage (versus the previous guidance of low double-digit), and the EPS is expected to increase by a low double-digit to low-teens percentage (previously high single-digit to low double-digit).
Analysts project continued strong growth of the company’s revenues in 2024 and beyond, helped by its effective R&D policy, allowing it to expand its drug portfolio at a higher rate than its competitors and ensure lower development time. The company has several promising treatments at various stages of development, with the expected new launches projected to further boost profitability.
One of the factors positively affecting AZN’s outlook is its announced entrance into the weight-loss drug scene. The company said it signed an exclusive agreement with the Chinese biotechnology firm Eccogene, granting AZN the right to develop and commercialize (outside of China) an experimental drug named ECC5004, currently in Phase 1 development. The early-stage drug belongs to the next-generation class of diabetes and weight-loss treatments, on the same level as Novo Nordisk’s (NVO) blockbuster Wegovy. The new drug will be produced in the form of an oral medicine, unlike current alternatives that have to be injected. In addition, it’s expected to be much cheaper to produce than the existing treatments, which means that the potential customer base will be considerably expanded, covering low-income populations in developed countries, as well as the emerging markets, where AstraZeneca has much higher historic presence than its competitors. Obesity is akin to a pandemic, affecting over one billion people globally, and the market for weight-loss drugs holds enormous potential.
The stock performances of global pharmaceutical companies in the past year reflect a split two-tier industry, with the stocks of Novo Nordisk and Eli Lilly (LLY), who sell weight-loss drugs, surging, while all the others lag behind.
In the past three years, AstraZeneca’s stock has risen 21%, outperforming all of its main competitors outside of the weight-loss race, including Pfizer (PFE), Merck, Novartis AG (NVS), Bristol-Myers Squibb, and Sanofi SA (SNY). AZN also outpaced the two major pharmaceutical ETFs, iShares U.S. Pharmaceuticals ETF (IHE) and VanEck Pharmaceutical ETF (PPH).
In the past 12 months, AZN’s shares were under pressure from macroeconomic headwinds and negative market sentiment, as well as from the projections of the negative impact of the Inflation Reduction Act (IRA) of 2022 on the industry’s revenues. However, AstraZeneca’s stock, which declined 5%, has fared better than most of its peers in the industry. It even outpaced IHE, despite the ETF’s large holding LLY, while mildly underperforming PPH, which has large holdings of both Novo Nordisk and Eli Lilly.
AZN stock is trading at valuations that are higher than Health Care sector companies. Its TTM P/E of 34 and a Forward P/E of 29 represent ~10% premium to the sector averages. Compared to its industry peers (without the weight-loss drugmakers), AstraZeneca comes at the higher end of the valuation range, with only Merck carrying a higher price tag.
However, taking into account the company’s forecast earnings growth and profit margins, AZN trades significantly below its fair value. TipRanks-scored top Wall Street analysts see an average upside of 69% for the stock in the next 12 months.
AZN carries a TipRanks Smart Score rating of 9/10 (“Outperform”) with a “Strong Buy” recommendation:
The company’s shareholders are generously rewarded through dividends, which AstraZeneca has paid for the last 23 years. Dividends are an integral part of AZN’s capital allocation strategy, which is centered around “a balance between the interests of the business, financial creditors, and the company’s shareholders.” Notably, according to the management, the company will seek “potential investment in immediately earnings-accretive, value-enhancing opportunities” only after “providing for investment in the business, supporting the progressive dividend policy and maintaining a strong, investment-grade credit rating.”
AstraZeneca has adopted a progressive dividend policy, intending to maintain or grow the dividend each year. As usual for the U.K. and European companies, dividends are paid twice a year, in February and August, with a greater proportion paid as a second interim.
The company’s current dividend yield of 2.2% is much higher than the average for the U.S. Healthcare sector (1.5%). The company’s commitment to compensating its shareholders, coupled with the modest payout ratio of 39.5%, a more-than-sufficient coverage provided by earnings, and a strong revenue growth outlook, permits an optimistic forecast with regard to AZN’s future dividend-per-share growth. Analysts expect to see AstraZeneca grow its dividends at a CAGR of 16% in the next three years.
In conclusion, we must agree with Bank of America (BAC) analysts, who said that AstraZeneca “has an attractive valuation for premium growth with the best pipeline in the sector,” as well as with Jefferies (JEF) analysts, who believe that the company’s existing treatments offer “significant upside optionality,” while its pipeline drugs hold “blockbuster opportunities.” In addition, TD Cowen analysts, who forecast a 190% upside for AZN’s stock, applaud the company’s strong financial and market position, as well as its impressive portfolio of new products and a robust pipeline, “which are anticipated to drive substantial growth in several large and expanding markets.” Furthermore, they believe that AZN’s strategic acquisitions, specifically that of Alexion, position the company for EPS growth that is expected to outpace the industry average.
All in all, this diversified pharmaceutical giant with one of the strongest balance sheets in the industry, robust operating fundamentals, an outstanding portfolio, a deep and balanced pipeline, exceptional growth prospects, and shareholder-friendly policies, is expected to maintain and broaden its success in the years to come, presenting an attractive long-term opportunity for dividend investors.
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