Equity Income 

Geffen: Is AstraZeneca the new Tesco?

Geffen: Is AstraZeneca the new Tesco?
 Neptune’s Robin Geffen believes AstraZeneca faces a choice of cutting drug investment or its dividend

Neptune boss Robin Geffen has predicted income stalwart AstraZeneca may become “the next Tesco” by halving its dividend as a result of growing financial pressures. 

Mr Geffen, manager of the Neptune Income fund, described the FTSE 100 company as “highly levered” and said it had little to show for the heavy investment made over the past half-decade.

Speaking at the ‘Income For All’ roadshows run by Investment Adviser sister title FTAdviser.com, Mr Geffen said a dividend cut would also highlight the concentration risk inherent in the UK equity income sector.

“It is either going to have to cut investment or cut the dividend. If they cut the dividend, in my view they will have to at least halve it.”

Almost half of all UK equity income funds have the stock among their top ten holdings, according to the manager. Figures from the Capita Dividend Monitor show AstraZeneca was the seventh largest dividend payer in the UK in 2016.

In share price terms, the company has performed well of late. Its shares are up 34 per cent over the past 12 months, and 17 per cent year to date. The stock spiked 5 per cent on May 12 after the firm announced positive results from the trial of a new lung cancer treatment.

But in April it reported that revenues had dropped 12 per cent year on year in the first quarter, increasing the focus on the company’s ability to develop new drugs in what management has acknowledged will be a “pivotal year” for its future.

Mr Geffen said AstraZeneca’s liabilities had risen from $29bn (£23bn) to $46bn since 2012 as a result of the 20 buys it has made in a bid to offset a coming “patent cliff”, wherein many of its older products can be generically reproduced. But this was “not translating into profitability”, he said.

“Earnings growth, gross cashflow and EBITDA growth [are] all at half 2011 levels…debt is rising, it is highly levered; net gearing is now 80 per cent versus a 22 per cent four-year average” the manager said in his presentation.

He compared the company to Tesco, which cut its own dividend in 2014 after revenue declines.

Mr Geffen’s own fund is split three ways, between “core income” shares that have grown their dividend for the past five years, “recovery plays”, and tactical positions reflecting Neptune’s in-house sector views. His fund retains a large-cap slant but is avoiding bond proxies such as Reckitt Benckiser and National Grid as well as AstraZeneca. The manager said he preferred businesses with international earnings such as Microsoft, British American Tobacco and Rio Tinto. 

He also warned the “free lunch is over” for fund managers, citing an era of higher inflation and political, social and economic uncertainty. On Brexit, Mr Geffen said: “Nobody can stand here and say what form Brexit will take. [But] there isn’t any UK politician who can guarantee a soft Brexit. It is not on the table, particularly now there is a very united France and Germany given the French election.”