Stephen Bland takes another look at AstraZeneca.
In December 2011 I commented on AstraZeneca (LSE: AZN) as a possible big cap value play. I like big cap plays because they are probably less risky than small caps, given the same fundies.
However against that, because these shares are so much more closely followed, it is pretty rare to find a big cap possessing value in abundance on my usual four basic pyad criteria. That's because a share satisfying such tight requirements is on the face of it very cheap, and the market will not normally allow a very large business to become that cheap, given the large number of brokers and investors that will constantly be interested in it. So nearly all pyad plays are small caps.
Because of that, I sometimes write up big caps here that possess some value features without being the full works, their large capitalisation standing in for the lack of some of the latter. Like the rich being different to the rest of us, by which I mean the super-rich and not just those with the odd million or two, big caps can be different to the rest of the market, so that weaker value credentials than I would desire ideally in a small cap could still offer a worthwhile play in a big one.
Three out of four
For AstraZeneca, my principal attractions for the strategy that I perceived in the earlier article were a high yield, net cash and a modest P/E. But it lacked the king of the value ratios, price/tangible book under one. In fact, it had very little tangible book at all, only a lousy $2.4bn, because its large intangibles figure comprised the great majority of its net assets. But three legs out of four aint bad for such a large company.
Today it released final results for the year ended 31 December 2011, so I'm doing an update to see if my previous conclusion that it was too cheap remains justified.
As before, and in my value player's detached style, I have little interest in what the company does. It's some sort of drugs business and that's almost overanalysing it. I get my high on their numbers, not on their pills.
Many other commentators and investors think that by attempting to understand the fine detail of the business they can make better investments. But I've found that real experts too frequently make poor investors, let alone those who pore over all the technical guff yet lack the knowledge to really appreciate it. The less you know the more you know.
The company accounts in US dollars. Revenue was down slightly for the year, but reported eps was up 31% to $7.33, whilst core eps rose 8% to $7.28. The difference is that reported eps includes all the stuff they have to include for accounting standards, which would bring in unusual items, such as the profit on the sale of a subsidiary, whilst core eps represents just their normal business activities.
Dividends amounted to $2.80 in total against $2.55 for 2010, an inflation-beating rise of 10%.
Not another buyback
The company continues to have net cash, amounting to some $2.8bn at the year end. And that is despite paying out what they describe as "net cash distributions to shareholders" of $9.4bn. 'Ang about though, I see that only $3.8bn of that went in dividends. So where did the other $5.6bn end up? Yup, you've guessed, down the toilet in buybacks.
So, in English as distinct from Directorspeak, the true distribution to all shareholders equally according to their holding was actually only $3.8bn. The other $5.6bn, far more than the dividend money, was never seen by the "shareholders", only by some institutional holders that could dump a line of stock at an advantageous price. And to rub it in they intend to blow another $4.5bn this way in 2012.
If you hold AstraZeneca, you could have had dividends on these figures some 147% higher, if they had used the money for that purpose instead of buybacks. That's close to two and a half times more. Yet there are small investors out there who can't see this, who actually buy the idea of buybacks. Turkeys voting for Christmas.
Gloom ahead
Looking ahead, the company comments that the coming years will be a challenge for the industry and itself. In a somewhat gloomy outlook, they see a reduction in 2012 core eps to between $6.00 and 6.30. The consensus analysts' 2012 eps forecast in pence is about 393p, which on a price of 2,972p gives a forward P/E of 7.6.
The expected dividend is 184p for a forecast yield of 6.2%, and it still has that substantial net cash balance. Note though that the sterling figures are affected by currency fluctuations.
So the three legs are still in place and are little changed from what I found earlier. I conclude that this share continues to be on the cheap side, but I wouldn't bet the pharm on it because of the declining or static eps picture for the immediate future.
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> The Motley Fool owns shares in AstraZeneca.
