Historically, AstraZeneca (AZN) was a leading global pharmaceutical company, but it has slipped down the rankings following a period of patent expiry on major drugs, notably Nexium, Losec and Seroquel. Understandably, the financial performance, particularly operational cashflow, has suffered through this period and AZN has moved from a net cash ($339m) position in 2009 to net debt of $16.3bn at the end of 1Q’19, necessitating a cash call. Better planning, notably earlier cessation of share buybacks and re-basing its dividend, would have left it in a much stronger position. Meanwhile, its use of ‘core’ EPS greatly overstates true performance.
On 27 March 2019, AZN paid its final dividend for fiscal 2018, which cost the company $2.43bn. Just two days later, the company announced a Placing of shares at 6050p, a discount of 6.7% on the previous close and at an estimated cost of $70m, to raise $3.5bn for working capital.
Like most companies, AZN uses a number of non-GAAP measurements to generate a ‘core’ EPS figure which is used in management KPIs and to calculate dividend cover. Because this calculation includes profits on asset disposals it overstates the performance vs. cashflow per share (CFPS).
AZN has been through a 10-year period where operational cashflow has been in decline, to a point where the dividend has been uncovered for four years. Payment of the 2018 final dividend and an upfront payment to Daiichi Sankyo for trastuzumab has left net debt at ca.$17.5bn (net debt/EBITDA 2.5x).
AZN has a policy to “…maintain or grow dividend per share…”, which is a key KPI on which long-term management remuneration is based. However, 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.
AZN is a good and well-run company, with one of the more promising R&D pipelines in the industry. However, the audit committee’s comfort with the over-statement of underlying operating performance through the use of ‘core’ EPS, has left the dividend uncovered, resulted in increased debt, and necessitated a Placing of shares to bolster its balance sheet. The current market valuation leaves little scope for any R&D disappointments.