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Is this top FTSE 100 income stock a clear takeover candidate?

Image: AstraZeneca. Fair use.

AstraZeneca (LSE: AZN) is one of the FTSE 100’s top income champions. The company is also one of the index’s most attractive takeover targets thanks to its promising drugs pipeline and relatively low valuation multiple compared to the rest of the sector. 

Indeed, right now shares in Astra are trading at a forward enterprise value-to-earnings before interest, tax, depreciation and amortisation multiple of 11.9, compared to the UK sector average of 22.4 and US average of 14.2. 

And while Astra may be one of the UK’s largest pharma companies, the firm is actually one of the smaller large-cap pharma stocks in the global universe. For example, its market capitalisation is currently £61bn, which is around a third of that of industry giant Pfizer.

An attractive target

For some of the industry’s larger players, Astra could be an attractive acquisition target. There’s even a chance several companies could work together to buy out the business and carve up separate parts, which would could allow the acquirers to offer a higher price more likely to tempt management into a deal. 

Astra is no stranger to takeover offers, having rebuffed an offer from Pfizer nearly three years ago. However, a lot has changed since Pfizer was sent packing by the company. The biggest change has been the post-Brexit collapse in the value of sterling, which has had the effect of making UK companies look more appealing to overseas buyers. A weak sterling has essentially put a huge ‘For Sale’ sign over British companies that are now 15% cheaper for overseas buyers. 

As well as the weaker pound, Astra has also made significant progress developing its promising oncology treatments since 2014. After achieving impressive test results in tests over the past few years, it is planning to submit breast cancer drug Lynparzafor for approval in the US in the second half of the year.

If it gets the green-light from regulators, Lynparza will be the first DDR treatment on the market for breast cancer. This is just one of a number of treatments it has made significant progress with since the initial Pfizer offer. 

Its small size yet promising drugs pipeline means the company looks like a very attractive acquisition target and the company is also well placed for growth even if a buyer does not emerge. 

Income champion

As I mentioned above, Astra is one of the FTSE 100’s income champions and this means investors can pocket an attractive 4.6% dividend yield while waiting for a buyer to emerge for the company. What’s more, if no buyer does emerge, it will remain an income champion as profits from new treatments start to flow.

The payout is currently covered 1.5 times by earnings per share, leaving plenty of room for upside as growth filters through. City analysts have pencilled-in earnings per share growth of 9% for the year ending 31 December 2018 as the company’s growth picks up. Unfortunately, earnings per share are expected to slide by 15% this year, but this contraction shouldn’t threaten the payout. The shares currently trade at a forward P/E of 16.2. 

Make money not mistakes 

Astra is a prime takeover candidate but buying a stock just because it could be bought out is a risky strategy as there's no guarantee a deal will ever actually happen. You should only buy a stock if you believe it has bright prospects as a standalone business. 

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.