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Better Dividend: AstraZeneca vs. Bristol-Myers Squibb

Dan Carroll
July 25, 2013

High yields aren't everything when you're searching for the perfect dividend stock. Great stocks for the long term require stability, financial success, and a business that can thrive for years to come -- all on top of a great and manageable dividend to deliver year after year. Big Pharma's a source of several solid dividend stocks, but just which pharmaceutical giants are the best for your dividend portfolio?

Let's compare two of the biggest names in health care, AstraZeneca (NYSE: AZN) and Bristol-Myers Squibb (NYSE: BMY), to see which, if either, of these frequent drug collaborators delivers the right dividend you can count on in the long run.

Looking at the numbers
Just looking at the yields, AstraZeneca immediately stands out as Big Pharma's highest-paying dividend stock. It offers a whopping 7.6% yield, and the company has raised that dividend every year since 2003. AstraZeneca shoulders a relatively hefty payout ratio of 62%, and while that's a cause for concern since it doesn't offer much flexibility in raising the dividend in the future, it's still less than some of the company's Big Pharma peers' ratios.

At first glance, Bristol-Myers doesn't stack up. The company's weak earnings in recent quarters have inflated its payout ratio to a ridiculous 157%, and Bristol's only been able to raise its 3.2% dividend every year since 2009. That's hardly the kind of track record that AstraZeneca's put together.

However, looking at strong dividend stocks is more than just comparing yields and matching up payout histories. A closer look at Bristol and AstraZeneca reveals a pair of companies that have been slammed by patent expirations to lead drugs that have taken painful bites out of sales. How these companies are coping with the patent cliff tells us far more about these stocks than their yields.

Bristol's murky future
Bristol's earnings haven't helped the company's performance lately, particularly after the firm recorded a $711 million net loss in the third quarter last year. Plavix, Bristol's once-leading blood thinner that sold more than $7 billion annually at its peak just a few years ago, has been decimated by its patent expiration. Full-year sales of the drug collapsed by 64% year over year in 2012 to $2.5 billion: still strong results, but a far cry from the financial foundation Bristol once relied upon.

Picking strong dividend stocks is all about looking into the long term, and Bristol will need to replace Plavix's standout sales in order to keep its place among Big Pharma's best. Fortunately, the company has other options: As fellow analyst Keith Speights points out, Bristol's one of the best in the industry at generating revenue from non-premier blockbuster drugs like Plavix. Therapies like cancer drug Yervoy, which could hit peak sales of between $1 billion and $2 billion, grew year-over-year sales by 47% last year and has done well since its approval back in 2011. Similar smaller-profile drugs like cancer therapy Sprycel and hepatitis B drug Baraclude have also taken some of the sting out of Plavix's sales slump.

Bristol has more patent expirations on the way, however, so the company's not entirely on stable ground. However, it does have one highly promising drug up its sleeve: Recently approved blood thinner Eliquis. Eliquis, which Bristol co-developed with Pfizer (NYSE: PFE), could reach peak sales of between $3 billion and $5 billion for the two firms, with Pfizer and Bristol splitting the sales 50-50. It's a boon for Pfizer but an even bigger win for Bristol, which will desperately need Eliquis's success to counteract other recent headaches -- such as diabetes medication Forxiga.

AstraZeneca's troubling sales crisis
Forxiga was developed jointly by Bristol and the other firm we're comparing, AstraZeneca. These two have collaborated on more than just this drug, but Forxiga's taken the spotlight recently after the FDA turned down the drug. Bristol and AstraZeneca will try again for U.S. approval and have already succeeded in getting Forxiga past European regulators, but peak sales estimates are muted. The diabetes drug has turned from an almost-certain blockbuster into a therapy that could see peak sales of just around $700 million unless the FDA reverses course.

It's bad news for Bristol, but even worse for AstraZeneca, which is facing a future filled with a lackluster drug pipeline and marred by patent expiration pain. Sales fell around 15% last year for AstraZeneca, and CEO Pascal Soriot said earlier this year that he expects further revenue losses this year. Soriot's expressed the need to bolster the company's pipeline, and so far he's turned toward acquisitions to fill the docket.

AstraZeneca's so far looked into acquiring biotech Optimer Pharmaceuticals (NASDAQ: OPTR) in what could be a cheap deal: Optimer's market cap is less than $700 million; however, the company's generating very little in sales right now, and sales projections for the firm's infection-fighting drug Dificid are weak at best for the near futur