AstraZeneca (LON:AZN): a good ISA candidate? Think again...

With the ISA deadline approaching for another tax year, now is the time to make sure you have made the most of your allowance. If you still have cash to put into your Stocks & Shares ISA then you might be considering investing in some well-known, dividend-paying FTSE 100 companies.

But it's not really that simple - even the best-known names require careful analysis before they can be admitted into our portfolios. You never know what you might find. 

Take AstraZeneca (LON:AZN), for example. The biopharmaceutical giant may be one of the largest companies listed in the UK, followed as it is by 24 brokers and with its share price at all-time highs, but some basic checks immediately throw up concerns about the sustainability of its 3.36% forecast dividend yield...

AstraZeneca's (LON:AZN) poor dividend cover

Dividend cover is a key measure of dividend health. The usual rule of thumb is that dividend cover of less than 1.5x earnings can become a concern.

• The rolling dividend cover is based on projected dividends and earnings. AstraZeneca's rolling dividend cover is 0.59.
• The historic dividend cover is, of course, based on historic dividends and earnings. AstraZeneca's historic dividend cover is 0.62.

Both of these figures are well below the 1.0x safety threshold and suggest that AstraZeneca is struggling to make its dividend payments. The fact that the group reduced its payment in 2016 before inching it back up again fits the image of a company that has reached the limit of its ability to pay dividends.

Does AstraZeneca (LON:AZN) have a strong balance sheet?

An alternative way to analyse dividend safety is to focus more directly on a company’s balance sheet strength. A highly leveraged company that struggles to meet its short-term liabilities is more likely to cut its dividend than a well-financed one.

A safe level of net gearing (net debt to equity) on the balance sheet is generally considered to be 50 percent or less. AstraZeneca's net gearing ratio is 107.7% - more than double the 50% threshold. In fact, net debt has grown at an alarming pace - from £363m (and a gearing ratio of 1.6%) in 2013 to £13bn in 2018. Revenue, net profit, earnings per share, and free cash flow per share have all declined in this period.

AstraZeneca's current ratio, at 0.96, also leaves a lot to be desired.

Income investing: what you need to know

For many investors, dividends are a vital part of their long-term strategy. That's why we have created a variety of income-focused stock screens, such as the Best Dividends Screen, to identify promising candidates for income portfolios. Take a look and see if any of the qualifying stocks might be worthy of further research.

If you’d like to discover more about dividend investing, you can read our free ebook: How to Make Money in Dividend Stocks.