Teva Pharmaceuticals (TEVA)

Declining sales allowances and huge non-GAAP adjustments erode the quality of recent growth

Teva Pharmaceuticals (TEVA) is currently viewed by many as a turnaround story. From 2006-2017, TEVA spent $26.2 billion on acquisitions which fueled its sales growth. However, that also ran the debt total from $2.1 billion in 2005 to a peak of $35.1 billion in 2Q17. Much of what was purchased became intangible assets and goodwill which peaked at $66.2 billion in 1Q17 vs. $3.1 billion in 2005.

During that period of acquired growth, TEVA was paying an increasing dividend. Shareholders saw quarterly dividends rise from 7 cents in 2005 to 34 cents in 2014. At that point, dividend growth stalled and remained flat until 2017 when TEVA cut the dividend to 9 cents and two quarters later suspended it completely.

In many ways, TEVA is still paying for this growth-through-acquisition plan that soured. The difference between GAAP and non-GAAP EPS remains enormous, which indicates some questionable quality issues for the non-GAAP earnings. Some of these adjustments also may be pulling future costs into these “one-time” items and could help boost margins for a short time in the future:

We also believe both TEVA’s GAAP and non-GAAP earnings have benefitted by reducing allowances which inflates sales and earnings growth and artificially improves margins as well.