In the dividend report card series, we analyze financial metrics to begin answering the following questions about a company's dividend:

  1. Over time, has this company steadily increased its payouts?
  2. How sustainable is the dividend?
  3. Does the company have room to further increase the dividend?

For a full explanation of each category, click here for a tutorial.

Today's pupil is AstraZeneca (NYSE: AZN), which has a 4.4% yield.

Dividend history

Metric

5-Year Annualized Growth Rate

Dividend per share

18.6%

Diluted earnings per share

17.6%

Source: Capital IQ, a division of Standard & Poor's.

A firm that increases its payouts in line with earnings growth has exhibited a commitment to keep the real cash (as opposed to unrealized capital gains) return of your investment consistent with its overall success. AstraZeneca's recent track record is near the golden 1-to-1 ratio that you want to see from your dividend payers, so it gets a 5 of 5 in this category.

Sustainability

 Metric

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

Interest coverage

24.2 times

10%

5

EPS payout ratio

37.9%

10%

5

FCFE payout ratio

35.4%

30%

5

Source: Capital IQ, as of Aug. 9, 2010.

With one of the best balance sheets in the big-pharma industry -- it has a 31.7% debt-to-capital ratio versus a median 41.2% for the industry -- AstraZeneca produces more than enough profit to cover its interest payments. It also covers its dividend with £2.6 in earnings and £2.8 in free cash flow for each £1 it pays out as a dividend. Based on this, I see no reason why AstraZeneca couldn't maintain its current dividend level.

Growth

Metric 

Trailing 12 Months

Final Grade
Weighting

Report Card Score
(out of 5)

EPS payout ratio

37.9%

10%

4

FCFE payout ratio

35.4%

20%

4

Sustainable growth rate

26.6%

10%

5

AstraZeneca appears to have plenty of room to grow its dividend over the next five years or so. With payout ratios below 40%, it is still able to reinvest more than 60% of its profits and cash flow into the business -- to repurchase shares, make acquisitions, expand abroad, etc. And if AstraZeneca can't find new projects that will increase shareholder value, it could always pay out more as dividends.

Competitors
An "ungraded" section of the dividend report card is to see how a stock's current yield stacks up against direct competitors'. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

Company

Dividend Yield

GlaxoSmithKline (NYSE: GSK)

5.4%

Bristol-Myers Squibb (NYSE: BMY)

4.9%

Novartis (NYSE: NVS)

4.1%

With its current yield at 4.4%, AstraZeneca falls roughly in the middle of its peer average, so it shouldn't have much in the way of peer pressure to either raise its dividend too quickly or slow it down.

Pencils down!
With all the numbers in, here's how AstraZeneca's dividend scored:

Weighting

Category

Final Grade

10%

History

5

 

Sustainability

 

10%

Interest Coverage

5

10%

EPS Payout Ratio

5

30%

FCFE Payout Ratio

5

 

Growth

 

10%

EPS Payout Ratio

4

20%

FCFE Payout Ratio

4

10%

Sustainable growth

5

100%

Total Score (Out of 5)

4.7

 

Final Grade

A

For a high-yielding company like AstraZeneca, an "A" is an excellent grade. Big pharma will have its challenges in the next five years as some blockbuster drugs come off patent and governments in developed markets apply pricing pressure in order to save money. Nevertheless, AstraZeneca is a solid health-care name to consider when building a high-yield portfolio.

Fool analyst Todd Wenning doesn't own shares of any company mentioned. Novartis is a Motley Fool Global Gains selection. The Fool owns shares of GlaxoSmithKline. The Motley Fool has a disclosure policy.