The Reasons AstraZeneca plc Won’t Make You Wealthy

Why I wouldn’t make AstraZeneca plc (LON: AZN) a core share in my portfolio.

| 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.

AZNIt’s been a rollercoaster period for FTSE 100 shares. Earlier this week the index tumbled a massive 127 points and, while investors should focus not on what the market does day to day but rather look at the long term trend — which is always up, as history has shown us — it’s still never exactly fun seeing the majority of your holdings in the red.

Shares in companies like AstraZeneca (LSE: AZN) (NYSE: AZN.US) will continue to perform well regardless of economic conditions. These types of companies are called defensives because the needs they serve don’t ever go out of fashion. A cyclical company, on the other hand, ebbs and flows with the economic cycle.

It’s a smart strategy to base your portfolio around some core defensive stocks. I’ll be looking at whether AstraZeneca is a good bet for such a position among your holdings:

Not a star income performer

One such quality of a defensive share is a solid dividend. Studies have shown that high yielding shares easily outperform the market in the long run.

AstraZeneca’s full-year dividend for 2013 came in at 175p per share, which means it provides an income of around 4.5%. That’s high — the FTSE 100 average dividend yield is 3%.

The problem with AstraZeneca’s dividend is that since 2011 it has been broadly flat. Not only that, the dividend cover for 2015 is 1.6 times prospective earnings, while typically an income minded investor would like to see coverage of around twice earnings.

So far, the pharmaceuticals giant isn’t looking like a sure thing for a ‘core’ position in your portfolio. But let’s look further.

Profitability is still declining

The pharmaceuticals industry has taken a battering from low cost, generic competition to some of the best selling drugs of yesteryear. The way to combat this is to come up with new medicines that are covered by fresh patents, but R&D comes at a price, and it isn’t cheap.

AstraZeneca has made diabetes treatment a priority and invested $4bn to take control of Bristol-Myers Squibb’s interests in the firm’s diabetes alliance.

While this is a positive step, the company is lagging behind rival GlaxoSmithKline in this regard, who had five drugs approved by the regulator last year. By comparison, none of AstraZeneca’s treatments in phase III trials will apply for regulatory approval before 2016.

Before then, profits will continue to hurt. In 2013 profit slumped over 50% to $3.3bn with core earnings per share set to decline somewhere in the teens over the coming year.

Does it make a good ‘core’ share?

As far as being a core share goes I don’t really like like AstraZeneca. It’s dividend isn’t growing and it doesn’t have terrific cover. I wouldn’t proclaim a dividend cut is likely anytime soon, but there are probably better options elsewhere in the market, that are nonetheless safer in that regard.

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.

Mark does not own shares in AstraZeneca.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

3 UK stocks I reckon could benefit from the upcoming general election

As the general election hurtles towards us, this Fool wonders which UK stocks could benefit, and focuses on three picks…

Read more »

BUY AND HOLD spelled in letters on top of a pile of books. Alongside is a piggy bank in glasses. Buy and hold is a popular long term stock and shares strategy.
Investing Articles

At 11%, this dividend share pays the biggest yield in the FTSE 100

When a dividend share offers a big yield, we need to be cautious of the risks. But I reckon this…

Read more »

British Isles on nautical map
Investing Articles

I reckon Hiscox shares could be one of the best bargains on the FTSE

I've been investing in FTSE companies for years, but after a major decline I've not seen a company with as…

Read more »

Grey Number 4 Stencil on Yellow Concrete Wall
Investing Articles

4 reasons I’d still buy National Grid shares in a heartbeat despite the recent wobble!

As National Grid shares plunged on the news of a right issue, I’m not flinching, and reckon it's a top…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

After gaining 45% in 12 months, is the Amazon share price now overvalued?

Our author thinks the Amazon share price might be too high. While the long-term future of the business looks bright,…

Read more »

Investing Articles

2 hot dividend stocks I’d buy and hold for 10 years

Our writer reckons these two dividend stocks could help her bag juicy dividends for years to come and explains why.

Read more »

British Pennies on a Pound Note
Investing Articles

2 dividend-paying penny shares I’d happily own

These two penny shares have caught our writer's eye for a combination of income prospects now and business growth potential…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

This FTSE 250 share looks like a bargain to me!

This FTSE 250 share has seen its price tumble due to chaotic local economic conditions in a key market. But…

Read more »