Investing the future while revenues fall takes its toll on the bottom line at AstraZeneca plc (LON:AZN).

AstraZeneca (LSE: AZN) (NYSE: AZN.US) reported a 4% drop in revenue in the third quarter, but spending on replenishing the company’s drug pipeline meant operating profits dropped 29% and reported earnings per share were down 16%.

AstraZeneca is currently being buffeted by a series of branded drugs losing their patent protection – part of what is being called the pharmaceutical’s patent cliff which is expected to cost companies tens of billions of dollars annually for the next few years — and seeing lower-priced generics rush in to take their business.

The loss of sales to generics is one reason AstraZeneca’s earnings are expected to decline this year and next.

Not just sitting by

The patent cliff hasn’t really caught anyone by surprise, and AstraZeneca’s shares have trailed the market over the past three years as investors waited to see how the company would react.

AstraZeneca has reacted by investing in its drug pipeline and cutting costs. The current round of restructuring is expected to provide nearly £500 million in annual savings by 2016.

While trying to become more efficient the company hasn’t lost sight of its research needs, spending more than £2.5 billion annually on R&D each of the past three years and has spent another £2.1 billion so far this year. This research is making progress as two cancer treatments and an asthma treatment have moved into Phase III trials (the final stage before regulators give them the thumbs up or thumbs down) in the past two months.

In addition, it has been buying up other people’s research. The company’s biologics arm, MedImmune, has announced two acquisitions since August in an effort to build out its cancer-related treatment portfolio.

How long?

Of course, investors don’t generally like to see their companies wasting away and it takes patience to see a company through the long drug approval process. Admittedly, AstraZeneca’s pipeline management hasn’t been the best and it will take time to recover.

The company has attempted to tide investors over by returning their cash to them via dividends — the shares currently offer an impressive 5.5% dividend yield — and buying back shares — nearly £7 billion have been spent since 2010 to buy back 13% of the company’s shares.

Unfortunately, with falling profits AstraZeneca has less cash to spend on these returns and last year’s returns outstripped free cash flow by over £600 million. So far this year — with no share buybacks — the dividend payments have not been covered by free cash flow.

AstraZeneca’s balance sheet is relatively healthy with a modest debt load so this trend could be continued for some time, but eventually the company will need to see new products reverse the decline in sales. For investors the question is: When will this happen?

AstraZeneca’s dividend yield looks very attractive in today’s market, but income seekers need to determine how sustainable that dividend income is before making an investment. I don’t think AstraZeneca will have trouble maintaining its payments to shareholders in the near term, but if sales continue to slide it could become an issue.

It’s been a great year for Vodafone Group plc (LON: VOD) shareholders.

With their shares up nearly 50% since the start of January to 226p, a 6.9p-per-share final dividend for the year ending May 2013 already in the bag, and an interim dividend still to come, there’s no denying it’s been a winning year for Vodafone Group (LSE: VOD) (NASDAQ: VOD.US) shareholders so far.

And it’s not hard to see why.

Pretty decent results

At full-year results time on 21 May, Vodafone reported a small fall in revenue for the year to 31 March, but adjusted organic operating profit was up 9.3%, adjusted earnings per share (EPS) rose 5% to 15.65p, and the full-year dividend was lifted 7% to 10.19p per share.

Based on the previous night’s closing share price of 197.6p, that dividend represented a yield of 5.2%, which was way above the FTSE average of around 3%.

Since then we’ve had a first-quarter update for the current financial year which was a bit mixed — reported revenue improved by 5.2%, but on an organic basis we saw a 0.8% fall, with the countries of Southern Europe still suffering after the eurozone disaster. But chief executive Vittorio Colao told us that “growth in emerging markets has accelerated, we now have over 5 million customers benefiting from Vodafone Red, and 4G is live in ten markets“.

Vodafone has also completed its takeover of Kabel Deutschland and now holds 76.6% of its share capital, opening up a market of 15.3 million potential new customers for its broadband-inclusive packages.

The big sale

That progress alone would be impressive, but I’ve still left out the year’s big deal — the disposal of Vodafone’s 45% stake in Verizon Wireless, which was confirmed in September.

The sale to Verizon Communications for a total consideration of $130bn was a great deal for shareholders, who are set to receive an $84bn windfall as a result — cash and a bunch of Verizon shares, worth a total of 112p per share, are heading their way.

The Verizon sale had, of course, been anticipated for quite some time, with various games of brinkmanship between the two companies having previously played themselves out.

Back in May, before the eventual deal rumours started to emerge, I was confident that Vodafone’s management was savvy enough to get a good deal for shareholders and for the Fool’s Beginners’ Portfolio. And I’m quite pleased to have been right about that, not long after investing guru Neil Woodford had sold his Vodafone stake.

Some dividend uncertainty

There has been one notable bit of perhaps-negative news, with Vodafone downgrading its dividend policy such that it only “aims at least to maintain the ordinary dividend per share at current levels“.

But while that might have disappointed those who wanted maximum dividend increases in the relatively short term, it does offer the company more flexibility in its still-growing business — and I think we’ll still see reasonable rises and attractive yields in the years ahead.

Overall, then, 2013 has been a kind year for Vodafone, and I’ll join its shareholders in toasting their success.

If you wait for the perfect time to invest, you’ll be sitting on the sidelines forever.

We all know the scariest stories are true stories, so gather ’round kiddies as I tell a tale of investing horror that will haunt your dreams and send shivers through your portfolio.

Joe is an ordinary soul. He works hard for his money, and whatever is left over at the end of the month he wants to put to good use. But, more importantly to his mind, he doesn’t want to lose any of it. Not a single penny.

Joe is a big fan of savings accounts, and has made good use of cash ISAs, index-linked savings certificates and fixed-term bonds over the years.

But when it comes to the stock market, he always found a reason not to invest.  It might be a war, oil prices, house prices, debt ceilings, bail outs, bail ins, too much QE, or an upcoming election. There’s always something to worry about.

He watched in the 1990s as the FTSE 100 (FTSEINDICES: ^FTSE) hit 3,000, 4,000, 5,000 and then 6,000, seemingly making new highs nearly every day as the decade drew to a close. I can’t invest after the market has gone up so much, he said to himself.

A few years later, he counted his blessings as the FTSE 100 index fell from its all-time high of 6,930 to 3,289 in a little over three years. He was tempted at times as this bear market growled away. But what if it falls further he thought? However, if it gets 10% cheaper from here, then I’ll buy.

When the turnaround came, he was still reluctant to take the plunge. The market has risen too far, too fast he said. When it pulls back another 10%, then I’ll invest.

Like most folks, he was scared stiff by the events of 2007 and 2008. Suddenly, even his rock-solid savings accounts seemed vulnerable. As the stock market plunged again, his interest in shares was piqued once more. Another 10% drop, he said, then I’ll buy in.

When the FTSE 100 rebounded in early 2009, he was caught on the hop. It’ll never last, said Joe. But you know what, if it falls back 10% from here, then I might buy in. The FTSE 100 crossed 4,000, 5,000, and then 6,000, all in pretty quick succession.

Now here we are at Halloween 2013. Although the UK market is yet to reach the high it hit in 1999, with reinvested dividends and regular investment, many Foolish types have made very respectable returns from shares over the last 20 years or so. You may well be one of them.

Joe, who may or may not be a figment of my imagination, currently gets 0.5% on most of his savings (which is then taxed, of course), and is no nearer to making his first stock market investment. His cash has just about kept pace with inflation over the years, but even that has become a struggle now. He’s started to get really worried about his retirement, and the lack of funds he has for it. Please don’t be Joe.

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Should I get out too after Tesco PLC (LON:TSCO) loses the Buffett gold star?

We all know the scariest stories are true stories, so gather ’round kiddies as I tell a tale of investing horror that will haunt your dreams and send shivers through your portfolio.

Tesco (LSE: TSCO) (NASDAQOTH: TSCDY.US) seems to be one of those Marmite shares, even within the Fool offices. Nobody can agree whether it is a long-term hold with a great dividend and a newly refocused structure, or a behemoth that has come to the end of any meaningful returns for investors.

I have been in the former camp since July 2011, and it has been a pretty unsettling ride so far. The fresh optimism brought on by the start of a shiny new year in 2012 was ripped apart by a 20% drop over the first couple of weeks. As was widely known, Warren Buffett had been an admirer of Tesco for some time, owning shares since at least as far back as 2007, and his topping up in November 2011 eased my frayed nerves on the grocer’s fortunes.

When that early 2012 dip happened, I was again safely harboured in the comforting arms of Uncle Warren who was saying everything was going to be okay. Tesco’s slide was precipitated by their first profit warning for over 20 years and, rather than running for the hills, Buffett helped himself to some more to bring his holding to over 5% of the company. (Indeed, we have detailed free report on Buffett’s interest in the business. Just click here to take a look.)

Since then it has been a story of disappointment and despair for shareholders, with only the dividend (still yielding 4%) as any real consolation for beleaguered shareholders. The sale of the Fresh and Easy chain signalled surrender in the US, and re-organisation in China put a lot of pressure on European operations that have so far not delivered.

To make matters worse now Buffett has sold part of his holding..! We can argue all we like about his motivations, but one thing is clear: he does not have the faith in Tesco right now to hold on to those shares.  

When the world’s greatest individual investor’s money talks, it’s time to listen. Me, I’m beginning to think the doubters were right all along and that maybe — whisper it quietly — Buffett might have missed out this time.

Should I get out now while i have only taken a bit of a mauling and look for some new ideas like the Fool’s top growth share? Maybe, and I’m not sure my nerves can take it much longer.  Earnings per share growth is expected to be low or even negative for the next couple of years, and prices still feel high in comparison, even though the price-to-earnings ratio is hovering around 10 or 11 times.  The assets are in a strong position and Tesco is a healthy company so I could be wrong, but I may well be escaping from this horror story — and sharpish.

By Tanya Jefferies

PUBLISHED: 11:04 EST, 30 October 2013 | UPDATED: 12:27 EST, 30 October 2013

City watchdogs are threatening a clampdown on fund managers which routinely pass ‘dealing’ and ‘research’ costs onto ordinary investors.

Fund houses are making clients fork out for services such as ‘corporate access’ – speaking to managers of firms where they want to invest – which alone totted up to £500million last year.

So-called ‘hidden charges’ like these have long come in for criticism from investors and campaigners, who believe they disguise the real cost of investing and erode returns.

Outspoken fund manager Terry Smith, who runs the Fundsmith Equity Fund, has also called for more transparency about dealing commission which he says often confuses investors. Continue reading “FCA tells fund firms to disclose hidden charges for dealing and research” →

By Adam Uren

PUBLISHED: 07:15 EST, 30 October 2013 | UPDATED: 09:17 EST, 30 October 2013

A plan to get a grip on ‘rip-off’ charges on workplace pension schemes so workers can get the best value from their retirement have been unveiled today. Continue reading “Crackdown on ‘rip-off’ pension charges explained” →

By Adam Uren

PUBLISHED: 07:15 EST, 30 October 2013 | UPDATED: 07:15 EST, 30 October 2013

A plan to get a grip on ‘rip-off’ charges on workplace pension schemes so workers can get the best value from their retirement have been unveiled today. Continue reading “Government’s plan to crack down on ‘rip-off’ pension charges revealed” →

Yes, it’s all decided. Play now. Pay later.

Let’s see, stocks moved up again yesterday. With the Dow up 111 points. Gold backed off – by $6. As usual, Bloomberg had a reporter on the playground:

“It still seems that the Fed has created this good news is bad news, bad news is good news scenario,” Randy Bateman, who oversees $15 billion as chief investment officer of Huntington Asset Advisors in Columbus, Ohio, said by telephone. “The anticipation is that the Fed will retain its purchasing of $85 billion in monthly Treasury and mortgage securities, which is going to continue to help the housing market. That will be taken fairly well by the market.”

The S&P 500 climbed in 13 of the past 15 sessions, as companies beat estimates in the current earnings reporting season and signs of slower economic growth fueled bets the Fed will maintain stimulus measures after its two-day meeting that started today. The rally has pushed the index up 24 percent this year, leaving it poised for the best annual gain in a decade.

Well… there’s the good news. Where’s the bad news that causes this good news? Bloomberg continues:

Data today showed retail sales dropped 0.1 percent last month, restrained by the biggest decrease at auto dealers since October 2012. Wholesale prices unexpectedly fell in September as food costs retreated. Inflation has been running below the Fed’s 2 percent objective in the near-term, giving policymakers room to maintain monetary stimulus.

Hmm… yes… bad. Janet Yellen does not like to hear about falling prices. She thinks her job is to make them go up. She wants more inflation, not less. So, there will be no tapering anytime soon. You can count on it.

But everyone knows that the Fed’s $85bn-a-month bond buying spree can’t last forever. And everyone knows that there will be hell to pay when it stops. Why? Because government finances, stock prices, corporate earnings and the bond market depend on the Fed’s EZ money. And nobody wants to find out what happens when the Fed stops. ‘Apocalypse now’? No, they’d definitely prefer an ‘apocalypse later’ situation.

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Bill Bonner on markets, economics & the madness of crowds

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The press referred to the recent threat of a government shutdown as “apocalypse now”. But it didn’t happen. The feds decided to go for ‘apocalypse later’. They kicked the can down to road to January.

There will be no apocalypse then either. Not as long as they still have a foot to boot it with. The apocalypse will be delayed, postponed and held off for as long as possible.

In the meantime, everyone seems to be enjoying higher corporate earnings. Where do these higher earnings come from? Believe it or not, much of it comes from borrowing!

Corporate America borrowed more than $1trn over the last three years – at artificially low rates. This increased their debt to $14trn, twice what it was when Alan Greenspan issued his famous “irrational exuberance” warning.

The cost of credit is so low that even the most reckless and least creditworthy corporations can still get loans, and stay in business. Junk bond defaults are running at only 1.6% – a third the average level of the last 30 years.

Meanwhile, the first 282 companies reporting earnings this season showed profits up 5.7% on sales increases of only 3.5%. How can you increase profits 60% faster than sales?

Easy. You borrow cheap money and lower your financing costs. Everyone knows that can’t last. Corporations can’t continue to borrow so much money at such low rates. But everyone is perfectly happy to postpone that apocalypse too.

Stock market investors are no dopes either. They know this Fed-driven bull market must come to an end sometime. By many different measures – price/earnings ratios, margin accounts, enterprise values, investor sentiment – the stock market is already in the danger zone.

What will happen? Either the Fed will really begin to taper – probably causing a crash. Or investors will get tired of investing real money in a phoney trend. Either way, when the apocalypse comes, it will be later.

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Information in The Daily Reckoning is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. The Daily Reckoning is an unregulated product published by Fleet Street Publications Ltd. Fleet Street Publications Ltd is authorised and regulated by the Financial Conduct Authority. FCA No 115234. http://www.fsa.gov.uk/register/home.do

The collapse of Royal Bank of Scotland plc (LON: RBS) provided some really scary money stories.

We all know the scariest stories are true stories, so gather ’round kiddies as I tell a tale of investing horror that will haunt your dreams and send shivers through your portfolio.

The collapse of Royal Bank of Scotland (LSE: RBS) (NYSE: RBS.US) must surely rank as one of the most gruesome stock-market tales of recent years.

The bank’s downfall has, of course, been documented extensively, and the shares today remain down 95% from their 2007 peak.

At the depths of the share-price lows during January 2009, a Fool started a thread on the discussion boards called “I am broke“.

In his message, he admitted he’d lost £47,000 on another share and owned up to having put everything he had left into RBS:

“After many months nursing my burnt fingers I decided to stick a last punt on RBS thinking that it’s been oversold. But now I have lost another £35K in 3 weeks.“

He then acknowledged: “I am broke. Totally. Who can really afford to lose £80k odd?“

And added: “Hopefully I will die young and not have to worry about my savings.“

Clearly the Fool in question, like the shares of RBS, had hit rock bottom.

And no doubt he had learned two old lessons about the stock market — never invest more than you can afford to lose and always spread your risk.

The Fool’s post triggered a response from an RBS staff member in a similar situation:

“I am an employee and I’m afraid I’m £120K down. That’s my lot, all my savings. I know I should have diversified but I saw colleagues retiring with generous savings on the back of buying every share option going so I did, too.“

“I’d cheerfully dance on Fred’s grave but ultimately it is my — your — fault as an investor. Caveat emptor.“

Once again, no diversification and no cash safety net if it all went wrong. Caveat emptor indeed.

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