One of the risks of investing in AstraZeneca (LSE: AZN) is the pharmaceutical patent cycle. In other words, AstraZeneca is still feeling the effects of the loss of patents for a number of key, blockbuster drugs from recent years and this is putting pressure on its bottom line. For example, last week’s results showed further challenges regarding its income statement, while its earnings have fallen by over 40% since 2011 and over the next two years they’re due to decline by a further 7%. In many investors’ eyes, this could be bad news for the company’s dividend outlook.
However, with AstraZeneca having a dividend coverage ratio of over 1.4, it appears to have sufficient headroom to at least maintain dividends over the medium term – just as it has done since 2011. And with AstraZeneca investing heavily in its pipeline of new drugs, its long-term profit outlook remains very bright. This is excellent news for its dividend potential and means that while dividends have flatlined in recent years, they could increase in the long run and boost AstraZeneca’s yield of 5%.
Furthermore, with AstraZeneca trading on a price-to-earnings (P/E) ratio of 14, it seems to offer excellent value for money and could be subject to an upward rerating in future.
Uncertain future?
One stock that also has a rather uncertain future is specialist lender Provident Financial (LSE: PFG). Its shares have fallen by 14% since the turn of the year as investors seem to be growing increasingly uncertain about the prospects for the UK economy. Specifically, there’s a concern that higher interest rates could lead to increasing default rates on loans, since low interest rates have become almost taken for granted by many borrowers and they may not have sufficient headroom for when rates rise.
Still, with Provident Financial trading on a price-to-earnings-growth (PEG) ratio of just 1.3, its shares seem to offer upside potential and a margin of safety. And with a yield of 4.6%, their dividend appeal remains relatively high. Yet due to the uncertainty surrounding the lending market, AstraZeneca seems to be a superior income play for the long term.
Stability star
Similarly, Rexam (LSE: REX) is also a relatively popular income stock. The packaging company may only yield 2.9% at the present time, but with dividends currently representing just 45% of profit, there seems to be considerable scope for shareholder payouts to rise at a rapid rate in future. And with Rexam forecast to increase its bottom line by 5% this year and 8% the year after, its dividend prospects are relatively bright.
In addition, Rexam is arguably a more stable business than AstraZeneca and offers greater peace of mind when it comes to profitability and dividend growth. And with its shares trading on a PEG ratio of 1.8, they appear to offer good value for money for such a stable and robust business.
However, with AstraZeneca having a significantly higher yield, offering better value for money and an exciting future due to a rapidly improving pipeline, it still seems to be the preferred option.
