AstraZeneca (LSE: AZN) is a company in the spotlight. During the recent bear market, the British-Swedish pharmaceutical stalwart showed its resilience by meeting the sustained demand for its products. But the current highlight is its leading position in the race to develop a vaccine for COVID-19.
However, if you have not yet bought AstraZeneca shares, I’d look for higher returns elsewhere. Currently trading on a price-to-earnings (P/E) ratio of 97, the risk of you not making a decent return from its shares, at this price, is high.
AstraZeneca share price performance
The AstraZeneca share price is at a historical high. Climbing steadily over the last 10 years it dropped in March in the stock market crash before exploding 53% to today’s peak price of 9,670p.
If you’d bought into AstraZeneca shares when I previously recommended them in April, you’d be sitting on a capital gain around 40%.
However, it does raise the question, how much further can it go? Share price prediction is not a Foolish pursuit, but suffice to say that buying a firm selling at 97 times the amount the firm earns in profits, is a risky business. Especially for big pharma where drug trial failures rates can be high.
For comparison, peers GlaxoSmithKline and Unilever currently trade on P/Es of 15 and 22 respectively. Large P/Es reduce shareholder returns because there is a bigger difference between what you pay and what you get returned in dividend yields and capital gains.
Even if there is good news on the vaccine front, the relatively large number of other competitors, when combined with strong political pressure, will likely cap any profits from the venture. Lower profits mean fewer earnings.
In addition, the recent share price hikes make it likely a successful vaccine is already priced in. Ouch!
Company fundamentals
Despite my previous observations about the AstraZeneca share price, the firm has a strong balance sheet and is globally renowned for its numerous patent-protected drugs and innovative pipeline. The latter will be to its advantage if it can develop its so-far-successful COVID-19 vaccine research.
However, over the last five years, the trend in Astra’s income statement for revenues and profits is downwards. Debt, in contrast, has risen.
Some of the losses can be attributed to the failed patent drugs, Crestor and Nexium, and these are now in the past. With other promising ventures in the pipeline, the foundations are there for further company growth.
Astra still paying dividends
Back in April, AstraZeneca shares were yielding just above 3% in dividends. Now, as the share price explodes, they are yielding only 2.4%. Admittedly, any dividend right now shouldn’t be sniffed at. However, it reinforces the point that higher share prices – and larger P/E values – lower shareholder returns.
AstraZeneca is a good company with excellent growth prospects. However, complete success for its COVID-19 vaccine is some time off, if at all. More share price growth, at this same high rate, is unlikely. If the vaccine trials aren’t successful, the market will be disappointed.
Although I think the company itself is worth an investment, it cannot be at any price. Higher prices reduce shareholder returns, increasing the risk of a purchase. Right now, AstraZeneca is too expensive for me. But, it may be worth locking in any capital gains and selling those shares if you have them.
