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.
