Teva Pharmaceutical (TEVA 4.87%) had a rough 2013. Between losing a court battle on the patent extension for Copaxone, its key branded product, and the loss of its CEO due to a feud with the board over restructuring, the company struggled significantly.
These struggles largely kept Teva's shares from participating in 2013's incredible bull market. In addition, as they affected the company's operations, they're also reducing my fair-value estimate to below where it was when Teva was selected for the real-money Inflation Protected Income Growth portfolio.
What does the future bring?
But no matter a company's past, what matters to investors is what it will do in the future. With Copaxone losing patent protection in 2014, a large portion of Teva's revenue and profit will be lost to generics -- a somewhat ironic fate for a company that is the world's largest generic-drug maker. Teva's immediate future looks a bit weak as that profit source evaporates, but the company's core generics operations will continue. That's the advantage of generics -- once a medication goes generic, it stays that way.
Between Copaxone's early loss and the discord from the management shake-up, my fair-value estimate for the company has been lowered to $31.6 billion. That's down from the $37.2 billion I estimated the company was worth when originally picking Teva for the portfolio. Still, the company's recent market capitalization of $33.7 billion is close enough to that estimate that I'm willing to hold based on valuation.
Teva's dividend remains covered by earnings, but with a payout ratio of 85%, it looks like there isn't much room to continue increasing the payout. That number may be a bit misleading, though, as Teva's second-quarter loss was driven by high legal costs. Litigation is a big risk in the pharmaceuticals business, but if those costs were truly one-time, then Teva's core looks stronger than that number would indicate.
Still, owning companies with rising dividends is a key part of the iPIG portfolio's strategy. Teva's dividend has been steady at 1.15 Israeli shekel, or $0.33, throughout 2013, and if the company follows past trends it may consider an increase around February 2014. Time will tell whether Teva continues its trend of increasing its dividend. In the meantime, the payout looks solid enough to continue to hold the company at least through that February announcement.
One key reason Teva still looks like it's worth keeping despite its current blemishes is that its balance sheet remains strong, with a debt-to-equity ratio of about 0.6. A strong balance sheet is what helps companies survive through tough times.
Net result -- hold but watch closely
Teva's 2013 challenges are reason to watch the company closely, but it looks as though it remains fundamentally solid enough to give it a chance to work through those difficulties and emerge stronger. As a result, I plan to continue holding Teva in the Inflation-Protected Income Growth portfolio at least through its February dividend announcement. A company's dividend is often a clear signal of its expectations for the future, and that will likely hold true in 2014 for Teva.
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