TAK - Takeda: Pipeline Expanding But Growth Worries Persist

2023-03-16 07:35:38 ET

Summary

• Takeda's late-stage pipeline is impressive with many candidates boasting very strong fundamentals.
• Technically though, shares are now coming up against significant overhead resistance.
• Dividend growth rates remain sluggish. Yield chasers need to be careful here.

Intro

We wrote about Takeda Pharmaceutical Company Limited ( TAK ) back in January of last year when we were convinced that TAK stock had limited downside risk. In fact, if we look at the technical reason behind our assumption at the time, we see below that shares had just completed a bearish pattern namely a descending triangle formation. Therefore, when we coupled this with the company's keen valuation and strong profitability trends at the time, we believed shares would ultimately begin to drift northward and this is what eventually played itself out in the stock. When we include dividend payments since January of last year, shares have actually returned 15%+ over this timeframe which is an excellent result really given the S&P has lost roughly the same number over the past 14 months.

Given the stellar rally as we can see above in Takeda since October of last year, now is when the challenge really begins for this stock concerning forward-looking gains. We state this because in order for shares of Takeda to trade higher, they will need to take out significant overhead resistance (Resistance which shares are only now coming up against).

Suffice it to say, it is all about Takeda's pipeline and how quickly candidates can come to market over time. Every net advancement in the pipeline (Concerning candidates getting closer to market) will be rewarded by the market due to more value being potentially added over time. The key word here though is "potential" although it goes without saying that the more candidates Takeda has in late-stage trials, the more possibilities the company has of growing its sales and earnings at a faster clip than what it is achieving at present.

Pipeline Strength

To this effect as we see below, the recent approval of the QDENGA in the EU & the UK is another stepping stone to facilitate broad access to this vaccine with QDENGA being only one of the many late-stage development programs Takeda currently has at its disposal. LIVTENCITY for example also has just recently gained EU approval & INCLUSIG is just off the back of meeting a primary endpoint in a phase three trial. Suffice it to say, there is no doubt that Takeda has solid momentum in its late-stage pipeline which is indeed needed for technical reasons mentioned earlier.

Now given the momentum Takeda clearly has in its pipeline as well as its generous 4% dividend yield, long-term investors may choose to remain long this stock (And continue to get paid the dividend) even if overhead resistance continues to be a stumbling block for some time to come. This though may be a mistake for the following reason.

Dividend Growth Worries

By taking the long-term route and essentially banking on Takeda's dividend, one must be pretty sure that one's purchasing power will be protected in the event capital appreciation in the share price is non-existing for some time to come. Therefore, the 4%+ yield is really only a starting point in this endeavor. One must also look at the trends correlated with dividend growth as well as balance sheet strength to ensure inflation does not erode nominal gains in this play.

In terms of dividend growth, the present $0.66 annual amount which corresponds to two simultaneous $0.33 per share payments is actually down from the $0.81 per year dividend in calendar 2021. Now if we look at some associated pay-out ratios below, we see that there are no problems with the cash-flow associated ratios but the GAAP earnings pay-out ratio is non existing for the following reason.

Over the past 12 months, $2.091 billion in GAAP net profit was not sufficient to cover the $2.130 billion in dividend payments over the same time frame. This is the first red flag in that if forward-looking earnings estimates disappoint, growth in the dividend will be difficult, to say the least. Furthermore, as we see below, Takeda's interest coverage ratio of 4.91 means its options are also limited on the balance sheet side due to its debt. Although, as we see below, Takeda's debt-to-equity ratio comes in below 80%, we must remember that well over half of the company's assets are made up of goodwill and intangibles which again bring risk if expectations do not come to pass.

These trends are crucial because one way to beat inflation over the long term is to focus on companies that have the capacity to increase their dividends on a regular basis. In other words, buying TAKEDA today @ a 4% yield (With no dividend growth) would mean it would take 25 years to recoup one's initial investment. If Takeda was able to average a mere 5% annual dividend growth rate, the investment would be paid off in a much lower 17 years.

Conclusion

Given Takeda's sluggish dividend growth rate along with the wall of overhead resistance above shares on the technical chart, we would be reluctant to put capital to use here on the long side at this juncture. An expanding pipeline is one thing but the market needs to see execution. We look forward to continued coverage.

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