AstraZeneca: Soaring Dividends Suggest Undervaluation

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 |  About: AstraZeneca Group plc (AZN)
by: Bennington Investment Ideas

AstraZeneca PLC (NYSE:AZN) is a leading global biopharmaceutical company. AZN has operations in 100 countries. AZN had about $33.3 billion in revenue in Fiscal 2010 with an operating profit of $11.5 billion. AZN has a market capitalization of $61.1 billion. AZN has a strong track record of paying dividends. AZN pays twice annually with a smaller dividend in August and a larger one in February as is the custom with many British companies. The smaller dividend has exhibited higher growth than the larger dividend. AZN's estimated forward dividend yield is 6.4% based upon a closing price of $44.75 and the author's projected annual dividend of $2.88. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Source: Author estimates, Yahoo! Finance

The above table shows that dividends are growing; however, the pace of growth has declined substantially over the past five years. The following graph shows the historical trailing twelve month yield and spread to the 10-year Treasury bond.

Created from data from Yahoo! Finance

The next graph shows the normalized performance of the stock price, the dividend, and the trailing dividend yield.

Created from data from Yahoo!Finance

The above chart is pretty interesting. Basically AZN has been growing its dividend in a pretty consistent pattern, yet the stock has hardly moved except for some fluctuations up and down with the market. Having written several articles like this, I've yet to see something like this. This suggests that it's quite undervalued or that there will be a severe decline in the dividend; however, the historical track record shows otherwise.

Dividend Discount Model suggests AZN is undervalued
The first step to using the dividend discount model is to calculate an equity hurdle rate with the Capital Asset Pricing Model. AZN has a beta of .65 and with the risk free rate at a very low 1.9% this gives the discount rate to be 6.5%. As noted above the forward dividend is approximately $2.90. Applying a long term growth rate of 2% gives an estimated price of $64.65 for AZN. This is approximately a 45% premium to the current price of $44.75. However, as with any dividend discount model, the result is highly sensitive to growth rate and equity hurdle rate assumptions. In this case, it would also be important to look at the forward dividend as well.

Prior to making an investment in AZN it would be important to do fundamental research around the company, its R&D efforts, and its drug pipeline. Expiring drug patents can have a substantial negative impact on the finances of any pharmaceutical company.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.