Should I Invest In AstraZeneca Plc?

Can AstraZeneca plc’s (LON: AZN) total return beat the wider market?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

To me, capital growth and dividend income are equally important. Together, they provide the total return from any share investment and, as you might expect, my aim is to invest in companies that can beat the total return delivered by the wider market.

To put that aim into perspective, the FTSE 100 has provided investors with a total return of around 3% per annum since January 2008.

Quality and value

If my investments are to outperform, I need to back companies that score well on several quality indicators and buy at prices that offer decent value.

So this series aims to identify appealing FTSE 100 investment opportunities and today I’m looking at AstraZeneca (LSE: AZN) (NYSE: AZN.US), the pharmaceutical company.

With the shares at 3154p, AstraZeneca’s market cap. is £39,490 million.

This table summarises the firm’s recent financial record:

Year to December 2008 2009 2010 2011 2012
Revenue ($m) 31,601 32,804 33,269 33,591 27,973
Net cash from operations ($m) 8,742 11,739 10,680 7,821 6,948
Adjusted earnings per share (cents) 510 632 671 728 641
Dividend per share (cents) 205 230 255 280 280

It’s hard to be cheerful about AstraZeneca’s 12% revenue decline and 21% fall in core operating profit during the first quarter. The well-flagged loss of exclusivity on several of its core drugs is to blame; names such as Seroquel IR, Atacand and Crestor have all found themselves exposed to generic competition as patents expire, and it’s hurting the company’s performance, a situation expected to continue through the year as the firm predicts, “mid-to-high single digit decline in revenue on a constant currency basis.”

One bright spot in the quarter-time results is a reassuring 9% upwards thrust in emerging-markets revenue. Around 21% of sales came from countries classified as ’emerging’, which is a figure large enough to be significant. Perhaps such up-and-coming economies can flower to deliver salvation for AstraZeneca, it’s certainly a possibility, and the firm is fighting back on several fronts to reignite its sales with targeted in-house research & development, and an active acquisition programme aimed at picking up often cash-exhausted drug development minnows that find themselves on the cusp of a mass-commercialisation breakthrough with their new formulations.

All in all, AstraZeneca is working hard on its drug pipeline ready to fuel its next growth spurt. Meanwhile, cash generation is holding up to support activities, including the tempting-looking dividend, which is at least some short-term consolation to hungry total-return seekers.

AstraZeneca’s total-return potential

Let’s examine five indicators to help judge the quality of the company’s total-return potential:

1. Dividend cover: adjusted earnings covered last year’s dividend around 2.3 times.  4/5

2. Borrowings: net debt is around 32% of the level of operating profit. 4/5

3. Growth: revenue, earnings and cash flow were all down last year; growth has stalled.  1/5

4. Price to earnings: a forward 10 looks ahead of current growth and yield expectations.  2/5

5. Outlook: recent trading is down; the outlook is cautiously optimistic, longer term.  2/5

Overall, I score AstraZeneca 13 out of 25, which inclines me to caution with regard to the firm’s market-outperformance credentials, going forward.

Foolish summary

Under-control borrowings and decent dividend cover are both reassuring. Negative growth and a lacklustre outlook combine to make the valuation seem generous. I’m keeping AstraZeneca on my watch list for now, despite the forward dividend yield, which is running at about 5.7%.

But at least one well-known, outperforming investor is an AstraZeneca believer. The firm is one of 8 Income Plays Held By Britain’s Super Investor. This report analyses the £20bn portfolio of legendary high-yield expert Neil Woodford and is free for a limited time. To discover the other seven of his favourite dividend growth selections, I recommend you click here

> Kevin does not own shares in AstraZeneca.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Could the FTSE 100 be set to soar in 2024?

The FTSE 100 keeps threatening to go off on a growth spree. And weak sentiment keeps holding it back. But…

Read more »

Investing Articles

Is this FTSE 100 stalwart the perfect buy for my Stocks and Shares ISA?

As Shell considers leaving London for a New York listing. Stephen Wright wonders whether there’s an undervalued opportunity for his…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

3 things I’d do now to start buying shares

Christopher Ruane explains three steps he'd take to start buying shares for the very first time, if he'd never invested…

Read more »

Investing Articles

Investing £300 a month in FTSE shares could bag me £1,046 monthly passive income

Sumayya Mansoor explains how she’s looking to create an additional income stream through dividend-paying FTSE stocks to build wealth.

Read more »

Investing Articles

£10K to invest? Here’s how I’d turn that into £4,404 annual passive income

This Fool explains how using a £10K lump sum can turn into a passive income stream worth thousands for her…

Read more »

Investing Articles

1 magnificent FTSE 100 stock investors should consider buying

This Fool explains why this FTSE 100 stock is one for investors to seriously consider with its amazing brand power…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 under-the-radar FTSE 100 stocks under £2

Jon Smith identifies two FTSE 100 stocks that he believes are getting a lack of attention from some investors but…

Read more »

Investing Articles

£8,000 in savings? I’d use it as a start to aim for £30k a year in passive income

Here's how regular investing in the UK stock market, over the long term, could help us build up some nice…

Read more »