Sometimes — most of the time, in fact — good investing decisions seem to boil down to the qualitative judgements we make more than the way we scrutinise a firm’s financial numbers.
I would argue that we need a good dollop of art as well as a smattering of science to excel in the game of investment.
A feeling in my bones
Much of the time, I seem to end up looking for clues to a firm’s potential, rather than hard facts and figures.
Take AstraZeneca now, for example. Based on the numbers alone, it would be easy to write the firm off as a dull potential investment and to move on to something more obviously exciting. At today’s share price of 4203p, the firm trades on a forward price-to-earnings (P/E) ratio of about 16 for 2016. City analysts following the firm expect earnings to slide 4% that year and those reduced earnings to cover a dividend payout just under one-and-a-half times for a yield of 4.3%.
Based on the numbers alone, AstraZeneca is not a growth proposition, but it is not a value proposition either. The firm has some attractions as a ‘defensive’-style investment in a nice, safe sector with consumer-product attractions and stable cash flow, and it is a big beast for sure. So, we might buy the shares believing the dividend payout to be safe and secure.
However, I have a feeling in my bones that AstraZeneca might be building up a head of steam for a sustainable growth spurt down the line, and recent news seems to provide tantalising clues that that feeling could be right.
A dual growth strategy
In the news today is AstraZenca’s announcement regarding the firm’s recent $6 billion bond issue. The company plans to use the proceeds of the issue to fund its acquisition of ZS Pharma, Inc. The directors reckon ZS Pharma is a good fit with AstraZeneca’s pipeline and portfolio in the area of cardiovascular and metabolic disease.
Firms don’t look for acquisitions unless they are seeking growth, so I see this development as a clue to AstraZeneca’s growth potential from here. The pharmaceutical industry is notoriously opaque. You could spend a week trying to explain to me the significance of what AstraZeneca gets with this acquisition and still not get through the fug between my ears. In many ways, I don’t need to understand too much, though, to make a successful investment.
What matters is that AstraZeneca’s directors see the value in the deal. The qualitative judgements I need to make surround the characteristics of the industry itself and whether or not I trust the management team at AstraZeneca.
AstraZeneca has a track record of developing blockbuster drugs organically, and as long as the firm keeps reinvesting into research and development there is every chance that new formulations will rise to boost earnings in the future. On top of that, the firm enhances its pipeline by combining well-targeted acquisitions. Such organic and acquisitive development strikes me as a dual growth strategy that could deliver for investors in the long run.
Is this a buying opportunity?
While we are waiting for growth to materialise, AstraZeneca offers, arguably, one of the safest dividends in the FTSE 100. With analysts yet to pencil in earnings upgrades, right now could end up looking like a good buying opportunity for those interested in AstraZeneca.
