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Can Teva Pharmaceutical's Dividend Even Survive?

By Keith Speights - Oct 22, 2017 at 7:02AM

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The drugmaker's dividend is a shadow of what it once was. But even shadows can disappear.

Several big-pharma stocks boast high dividend yields. None of them, though, come close to the 7.5% yield that Teva Pharmaceutical Industries Ltd. (TEVA 4.92%) has recently claimed. Note the use of the past tense, though. 

Teva slashed its dividend payment by 75% in August. With the massive dividend cut, Teva's yield will be close to 2%. Teva also lost around 60% of its market cap as a result of this cut, along with announcing a dismal outlook for the full year. Considering the challenges the company faces, can Teva's dividend even survive?

Hand holding jigsaw puzzle piece with question mark on it

Image source: Getty Images.

Doom and gloom

It's hard to know where to begin with the negatives for Teva. Numerically, the biggest issue is the company's debt of $35.1 billion. Because of this huge debt load, Teva paid interest expenses of $436 million in the first half of 2017. Servicing its debt could legitimately be viewed as the primary threat to Teva's continuation of dividend payments.

There's a good argument, though, that intensified competition for Teva's top-selling drug Copaxone could be nearly as significant of a problem. Sales for the multiple sclerosis drug dropped 10% in the second quarter, even with Teva hiking its price by nearly 8% earlier in 2017. Teva's strategy was to protect revenue for Copaxone with its 40 mg/ml version, but Mylan (MYL) won Food and Drug Administration (FDA) approval of a generic for this dose earlier this month.

Copaxone currently represents one-fifth of Teva's total revenue. More steep declines in sales could weaken the company's ability to fund its dividend program.

Deterioration in the U.S. generic drug market is yet another worry for the company. Nearly 24% of Teva's total revenue stems from its U.S. generics business. While that revenue increased in the second quarter, it was due to Teva's previous acquisition of Actavis Generics. Two dynamics are especially creating headwinds in the U.S. generics market: faster-than-anticipated price erosion and increased competition as the FDA approves more generic drugs.

On top of these problems, Teva faces a meltdown in Venuzuela. In the second quarter of 2016, the company reported generic sales totaling $206 million in the South American country. That amount plunged to only $24 million in the second quarter of 2017 due to the economic crisis in Venezuela.

Possible silver linings in the clouds

Is there any reason to hope that Teva could see better days ahead and keep the dividends flowing? Yes. For one thing, Teva is taking steps to reduce its debt by divesting some of its assets. In September, Teva announced the sale of contraceptive devices manufacturer ParaGard for $1.1 billion plus its remaining women's health businesses, for nearly $1.4 billion. More divestitures should be forthcoming.

While Teva probably won't be able to fend off competition for Copaxone, the company has other promising specialty drugs that could help offset some of the revenue decline. Teva launched Austeda in April for treatment of abnormal involuntary movements associated with Huntington disease. Late-stage studies of experimental migraine drug fremanuzemab went well. Teva recently submitted for FDA approval of the biologic. 

Over the long run, it seems reasonable to expect that Teva's U.S. generics business will improve. Aging baby boomers will drive demand higher for prescription drugs. Payers will continue to heavily promote use of cheaper generic drugs over high-cost brand drugs. Even though Teva and others could experience more price erosion and competition, rising demand could still work to the company's benefit over time.

Teva also has a new leader at the helm with solid experience. In September, the drugmaker named Kaare Schultz as its new CEO. Schultz came from H. Lundbeck A/S, where he led a significant turnaround -- something that Teva sorely needs.

Will the dividend survive?

There's no question that Teva faces difficult challenges to overcome. I wouldn't want to be in Kaare Schultz's shoes right now. But the company's problems don't mean that its dividend won't stay in place. I think it probably will -- at least for now.

In my view, Teva's huge dividend cut makes it more likely that the dividend will survive. With the reduced dividend payout, the company will pay in the ballpark of $350 million in dividends over the next four quarters. Teva's asset sales should allow the drugmaker to pay down debt while keeping the dividend checks rolling. 

Whether or not Teva continues paying dividends over the long run, though, depends on how Schultz fares in his turnaround effort. A lot also hinges on how Copaxone holds up against generic competition. Uncertainties loom large, but one thing you can be sure of: Teva's high-yield days are over.

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