Merrill Lynch critiques Teva over dividends

“We don’t get the sense that management is excited to think about its dividend as a meaningful portion of an investor’s expected return in owning Teva shares."

By TAL MOISE/GLOBES
Teva Pharmaceutical Industries. (photo credit: Ariel Jerozolimski)
Teva Pharmaceutical Industries.
(photo credit: Ariel Jerozolimski)
Merrill Lynch questioned the dividend policy at Teva Pharmaceutical Industries in a new review.
“We don’t get the sense that management is excited to think about its dividend as a meaningful portion of an investor’s expected return in owning Teva shares. But, with a large revenue base that becomes increasingly tough to grow at a high rate, we believe more discussion around Teva’s capital deployment strategy is inevitable.”
Analysts Gregg Gilbert, Haim Israel, and Sumant Kulkarni nevertheless reiterate their “Buy” recommendation for Teva, with a target price of $52.
“With a 4-5% yield available from US major pharma stocks, Teva’s yield may not be enough to attract income-oriented investors at this point, but we believe it should offer some level of downside protection for the shares.
We continue to rate Teva shares ‘Buy’ as we believe investors appear overly pessimistic on the size and duration of Copaxone cash flows, dismissive of laquinimod as a potential driver, and skeptical of effective cash deployment,” the analysts added.
“While debt pay-down following the Cephalon deal will likely be a priority, we estimate an average of just under $4 billion in annual free cash flow (pre-dividend) generation in 2012-2015. Teva’s current dividend burden is only roughly $800 million per year. In the past few years, Teva has increased its dividend in the mid- 20% range.”
The analysts estimated Teva’s dividend yield at 2.3% in 2011-12, and 2.4% in 2013. They predict 9.2% sales growth in 2011 to $17.6 billion, and 23.8% growth in 2012 to $21.8 billion, but falling by 5% to $20.7 billion in 2013.
Gilbert, Israel and Kulkarni predicted non-GAAP earnings per share of $4.90 in 2011, up 8% over 2010, and rising 26% to $6.17 per share in 2012, but falling 14.3% to $5.29 per share in 2013. They predict non-GAAP net profit of $4.39 billion in 2011, $5.52 billion in 2012, and $4.73 billion in 2013.
Teva’s share price rose 2% on Nasdaq to $29.42, giving a market cap of $35.1 billion, and rose 0.6% by midafternoon to NIS 142.80.