AstraZeneca puts a lot of value on a stable dividend and earnings per share. Is that a good idea?
$4.20. This little number probably takes up quite a bit of space in the minds of executives at AstraZeneca. Azip, one of the company’s long-term incentive plans, is based on it. Azip awards are based on a four-year period from the beginning of 2013 to the end of 2016. The hurdles are simple: the dividend must not be cut, and earnings per share must not fall below 1.5 times the dividend. If either hurdle is missed during the period, the whole Azip award is forfeited. The award for Pascal Soriot, the company’s chief executive, is 89,960 shares, or £4.1m at the current price.
AstraZeneca’s dividend is $2.80; multiplying that by 1.5 makes $4.20. So, $4.20 is important. One should not exaggerate how important. Azip only represents 25 per cent of the long-term incentives for Mr Soriot. Still: £4.1m.
In 2013, AstraZeneca earned $5.05 per share. In its third-quarter earnings announcement on Thursday, the company said earnings would fall 15 per cent in 2014, in part because of the stronger dollar. That equates to $4.29.
If the company misses by a per cent or two, Mr Soriot’s £4.1m goes wherever incentive payments go when they do not go to executives. The company also gave a preview of 2015, saying that earnings would fall no lower.
Keeping earnings stable until the end of 2016 will not be easy. Most importantly, the acid reflux drug Nexium, which provides 14 per cent of revenue and probably an even larger slice of profits, may not keep its US patent protection.
The US Food and Drug Administration provided some help on Thursday when it withdrew its earlier support for generic Nexium from Ranbaxy, because that company’s plants were below standard. Other big products, such as Crestor and Seroquel, are in decline. But AstraZeneca’s pipeline, in oncology and diabetes especially, is very promising. That may well be enough.
A bigger question remains. Azip prioritises stability in the dividend and profits. If AstraZeneca aimed to be a defensive pharma investment, that would be fine. But after rejecting a rich offer from Pfizer, it has pinned its hopes on research and new products. Is that a good fit with Azip?