AstraZeneca (AZN)
Investment Research Report

 Updated 1Q18

Fundamentals and Company Overview
AstraZeneca (AZN) is a United Kingdom-based pharmaceutical firm with a solid history of delivering high quality medicines to markets globally. The company’s UK basis is also a competitive advantage in bringing drugs to market in non-FDA regions before coming stateside, a strategy few American-based firms follow.

The company’s revenue is in a slight decline, down 15% over the last three years. However, that is largely a result of currency impacts, since the firm receives revenues in world currencies but reports in U.S. dollars. While the dollar has declined in the last few months, it was still up 18% from 2014 to 2017, corresponding nicely with AstraZeneca’s revenue weakness. Somewhat understandably, the stock has drifted along with the top-line trend.

Excluding currency issues, AstraZeneca’s business is solid, but by no means growing fast. However, this is bound to change in the next 2-3 years thanks to a rebound in the firm’s plans to release several new high value products. Relief from the dollar will also help.

The biggest driver behind our decision to buy AstraZeneca now is its product pipeline. Five drugs have received Food and Drug Administration (FDA) clearance in recent years, including Brilinta, a drug for arterial thrombosis. This condition is the result of a high-fat diet, smoking, high alcohol intake, a lack of exercise, and high cholesterol. In other words, it is a lifestyle condition that is becoming increasingly common globally as a sedentary lifestyle and a western diet permeate the developing world. For instance, obesity rates have doubled in China in the past decade. At the same time, hypertension is up by a third. Similar increases are found in Brazil, India, and Indonesia as these countries get richer.

While other companies are developing drugs to combat arterial thrombosis, there is plenty of room in this growing market for everyone. Additionally, AstraZeneca has a solid reputation in this particular area of drug development, with over a dozen drugs for cardiovascular issues currently on the market.

Price and Dividend History
AstraZeneca’s dividend has been growing over the last decade, until a steep drop in late 2015. The company follows the British custom of releasing two dividends annually, with one significantly larger than the other. While this makes it unattractive for income investors who like seeing stable checks come in the mail, the annual picture is what we care about and is encouraging: since 2015, the company has paid $1.37 a year without apparent pressure.

Risks and Considerations
The biggest risk with any pharmaceutical company is that its future revenues fail to arrive because the FDA rejects its products. While this is a risk for AstraZeneca (and the FDA’s reach is increasingly global), the firm has proven able to release new drugs with impressive frequency. An additional issue is the impact of greater competition from smaller startup pharmaceutical companies who seek smaller margins for similar products. This could threaten the company’s free cash flow on a long-term basis, but is not as immediate of a risk as is the possibility of the FDA shutting down some of its most promising products.

The biggest risk to the company is a decline in free cash flow (FCF). Any dividend growth stock is dependent on free cash flow to increase dividends. This is largely the responsibility of the company’s Chief Financial Officer, who looks to optimize the company’s incoming cash, assets, and access to various debt instruments to insure enough cash is coming in and not too much is going out to maintain payouts. FCF plummeted 63% in 2015 but has since started moving in the right direction again. At this point, the dividend feels sustainable, especially as new therapies come to market.

That last bit is the most crucial. Investors are eyeing the steep fall in free cash flows as a problem for the company’s dividend without realizing that AstraZeneca is using this money for developing new products. A bet on AstraZeneca is a bet that management knows what they are doing and this investment will yield new products that catalyze more dividend growth in years to come.

Stock Price, Historical Chart