Buying and holding dividend stocks for the long term has proven to be an outstanding way to build wealth. Not all dividend stocks are created equal, though, with some presenting substantially better investing opportunities than others.
Teva Pharmaceutical Industries (NYSE:TEVA), for instance, has long been a favorite name among income-seeking investors because the company has a well-documented history of increasing its payout, in line with the prevailing sector-wide average. At the same time, the stock has not provided much growth over the last decade, evinced by the chart below:
In fact, a disproportionate amount of Teva's share price growth has come in 2014, with the stock up 47% year to date. Even so, shares remain well off of their 2010 highs, making the dividend a prime reason to invest in this generic and specialty pharmaceutical company.
What does 2015 hold for Teva?
Teva faces a pivotal year that could hold many surprises for shareholders. The company is staring down four major issues that are likely to shape Teva's future for a long time.
First, there is the pending introduction of generic competition to Teva's best-selling multiple sclerosis drug Copaxone. Copaxone presently accounts for roughly 20% of all Teva's pharma sales, and 50% of the company's profitability.
Per a recent investor update, Teva now believes generics will hit the market in September 2015, and are projected to cost the company somewhere between $360 million and $600 million in sales. Management hopes to blunt the impact of generic competition by transferring patients to its higher dose (40mg) formulation of Copaxone that allows them to take their medication less often (three times a week vs. daily). Time will tell how successful the company is in this endeavor.
The next big issue management needs to contend with is the falling sales of its generic products. In the third quarter, for example, Teva's generic drug sales fell by 2% year over year to $2.4 billion. Going forward, generic drug sales are expected to fall even further once additional generic competitors hit the market in the first half of 2015 for AstraZeneca's (NYSE:AZN) asthma drug Pulmicort. Teva lists its generic version of the drug (Budesonide Inhalation) as one of its most significant generic products in 2014, but offers little in the way of a revenue breakdown via the latest 10-Q.
Because Teva does not provide much info regarding its generic Pulmicort revenue, the exact impact of newer rivals will be difficult to assess until it happens. But some estimates suggest that Teva could see a notable $300 million drop in revenue in 2015, due to the introduction of new generic versions of Pulmicort.
Thirdly, Teva plans on reducing costs to save an estimated $650 million next year because of the loss of patent protection for Copaxone and falling generic drug sales. Although the nitty-gritty details of these cuts have not been revealed yet, management believes they should keep diluted earnings per share roughly flat, year over year, at $5.
The fourth looming issue investors should be aware of is the potential for Teva to pursue an acquisition to bolster its revenue stream. With a growing cash position that should top $1.5 billion in the first quarter of 2015, Teva could make a splash on the mergers and acquisitions scene by acquiring a specialty drugmaker. After all, fellow specialty and generic-drug maker Actavis (NYSE:AGN) has shown that this approach toward creating growth can result in an earnings bonanza, when done correctly. Given the significant pressure on its top line, Teva is probably already hunting for an appropriate takeover target.
Does Teva belong in your portfolio in 2015?
Teva's growth outlook looks mixed, with its top line falling due to the loss of Copaxone and increasing competition for its generic products. While earnings per share look stable in 2015, this is only true because of the forthcoming cost cuts.
Investors should be wary of the potential for a steep reduction in Teva's dividend. A costly acquisition looks likely in 2015 that may force the company to conserve cash by reducing the payout or suspending its share buyback program.
The bottom line is that there are too many uncertainties surrounding this top dividend stock right now. By the end of 2015, Teva looks poised to be in a fundamentally different place, and that is keeping its stock from being a compelling buy at this point.
George Budwell has no position in any stocks mentioned. The Motley Fool recommends Teva Pharmaceutical Industries. 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.