Can AstraZeneca afford its fervent commitment to paying a high dividend?

AstraZeneca is one of the most generous biopharma companies when it comes to dividends, but that strategy comes with risks.

When Bernstein analyst Tim Anderson expressed worries about the future of AstraZeneca’s dividend during yesterday’s third-quarter earnings conference call, CEO Pascal Soriot answered in the most passionate of terms. The company is devoted to paying a dividend "today, tomorrow, and thereafter," he said.

But can AstraZeneca afford such unwavering commitment to its dividend? It’s a legitimate question, especially considering how tough investors can be on companies when they fail to live up to dividend vows. Witness GlaxoSmithKline, which saw its shares fall more than 5% last month after executives couldn’t commit to keeping that company’s dividend intact beyond 2018.

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Granted, AstraZeneca is in a bit of different position than GSK. Glaxo’s ability to continue paying its dividend is threatened by the possibility that it might lay out a lot of cash to buy Pfizer’s over-the-counter products unit. AZ’s challenge is significantly more tangible—its cash flow is under pressure at a time when it’s facing generic competition on older drugs, pricing competition on newer products and investor demands to deliver on its pipeline, particularly in immuno-oncology.

AZ’s dividend rate of 90 cents, equating to a trailing annual dividend yield of 8.4%, ranks it among the most generous biopharma companies relative to its free cash flow and debt, according to an analysis by Bloomberg. The company’s $15 billion in debt, which piled up during past acquisitions, far eclipses its $4 billion or so in free cash flow, making its dividend burden heftier than that of other Big Pharma companies like Eli Lilly and Bristol-Myers Squibb.

AZ has tried to address its cash-flow situation by shedding non-core assets. The company sold its anesthetics portfolio to Aspen, some antibiotics to Pfizer and a gout medication to Ironwood, for example, all of which helped drive earnings beyond expectations earlier this year. And yesterday’s results of $6.23 billion in sales for the quarter and EPS of $1.12 also beat estimates.

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Still, the threats to AZ’s cash flow were evident in the results. The company’s operating expenses were higher than expected. And its expenses will only grow with ongoing product launches, like Imfinzi in bladder cancer and newly approved Calquence in mantle cell lymphoma. That outlook, reaffirmed during the earnings announcement yesterday, “fits with our belief that EPS in 2018 will be lower than in 2017, despite product sales growing in 2018 vs. 2017,” Bernstein’s Anderson wrote in a note to investors.

There were some highlights in the third quarter to be sure. Cholesterol medication Crestor brought in $580 million despite mounting generic competition. Blood thinner Brilinta and diabetes drug Farxiga both grew more than 30%. And investors are hoping that ongoing trials of cancer drug Imfinzi, a checkpoint inhibitor, will help expand the drug’s market and raise AZ’s profile in immuno-oncology going forward.

But investors have long been drawn to AZ because of the reliability of its dividend, and that’s not likely to change anytime soon. The company adopted what it calls a “progressive dividend policy” several years ago, vowing to maintain or grow the dividend each year depending on earnings prospects. When Soriot took over as CEO in 2012, the board reassured investors that the dividend policy wouldn’t change.

Soriot was so determined to reassure investors yesterday that after he repeated the dividend commitment during the investor conference call, he asked CFO Marc Dunoyer to comment on it, too. “We remain committed to our progressive dividend policy,” Dunoyer said.