As all Foolish investors know, dividends are often a key part of an investment portfolio. Indeed, numerous pieces of research over the years have shown that dividends, when reinvested, tend to make up a significant proportion, if not the majority, of total returns over the long run.
Therefore, companies that don't pay dividends may find themselves being left out in the cold by investors -- unless they can provide significantly higher rates of earnings growth to make up for it, that is.
Strong share price performance
One company that falls into this category is Hospira (NYSE:HSP). It didn't pay a dividend last year, but was able to grow earnings per share, or EPS, by a whopping 674%, although this growth rate is slightly misleading as it followed two highly challenging years for the company. The first, 2011, was a loss-making year, while 2012 saw only a modest profit. Nevertheless, shares have easily beaten the S&P 500 during the last year, with Hospira delivering gains of 41%, while the S&P has lagged behind with 22% gains.
A lack of dividends
Despite this marked improvement in profitability, Hospira is not forecast to pay a dividend in 2014 or 2015. This is in spite of the company being expected to deliver EPS growth of 2% and 7%, respectively, in those two years.
This situation may appear to be slightly frustrating for shareholders. Once the exceptional growth rates have shaken out and the company reverts to market average growth rates, which are forecast for 2014 and 2015, what could help drive the share price higher?
One potential catalyst could be the continued strengthening of the business, which the stock market has clearly warmed to during the last year, as shares have performed strongly. This strengthening is taking the form of, among other areas, increasing capacity at manufacturing facilities and modernizing Hospira's various plants, as well as seeking expansion in emerging markets.
Indeed, a recent presentation given by CEO Mike Ball included slides that showed the company was making progress in a number of key areas, such as those mentioned above. Furthermore, such improvements are delivering some benefits now, but seem likely to generate the majority of benefits in future years. So, with developments thus far improving sentiment, and pushing shares higher, it's possible that further steps forward with regards to strategy implementation could act as a catalyst for the share price.
Big changes at other pharmaceutical stocks
Of course, Hospira isn't the only Pharmaceutical major that's going through a period of change. Sector peer Bristol-Myers Squibb (NYSE:BMY) is attempting to transition from being a producer of mass-market drugs to a specialist, niche player. As with Hospira, the market seems to be warming to this strategic turnaround, with shares easily outperforming the index during the last year -- up 48% versus up 22% for the S&P 500.
The changes at Bristol-Myers Squibb have included a sale of its share of the joint venture with AstraZeneca (NYSE:AZN) for around $2.7 billion. This seems to make sense for both companies, and sees AstraZeneca continue its fight back against a patent cliff that was among the most challenging in the global Pharmaceutical industry. Although AstraZeneca's earnings are expected to fall in 2014 and 2015, they are expected to show growth after that, and shares have responded accordingly -- they were up 49% during the last year versus +22% for the S&P 500.
Indeed, the strength shown during the last year in Hospira's share price seems to be in anticipation of the benefits from the changes that are being made by its management team. Although a dividend would doubtless be welcomed by shareholders, there seems to be adequate potential from the strategic changes being made to drive shares upwards during 2014 and, crucially, for them to continue to outperform the S&P 500 during the remainder of the year.
Peter Stephens owns shares of AstraZeneca. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.