Are AstraZeneca shares worth buying?

AstraZeneca shares have a high price-to-earnings ratio, but I don’t think you should let that put you off this FTSE 100 (INDEXFTSE:UKX) stock.

| 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.

Illustration of bull and bear

Image source: Getty Images.

Since the stock market crash in March, investors have become wary of which shares to buy. This has resulted in some sectors being avoided and others seeing high demand. Unloved sectors include travel, hospitality, oil and finance, while loved sectors include technology and pharmaceuticals. This has led to a lot of high-quality shares with ridiculously high price-to-earnings ratios (P/E). Think AstraZeneca (LSE:AZN) with its earnings multiple of 104, Avon Rubber at 86 and Games Workshop at 45.

As I consider buying these shares, I worry if a market correction occurs, I’ll have paid too much at a price point that’s unsustainable. This problem is not unique to the UK, it’s even more prevalent in the US, where Tesla has reached an astronomical P/E of 959.

5 Stocks For Trying To Build Wealth After 50

One notable billionaire made 99% of his current wealth after his 50th birthday. And here at The Motley Fool, we believe it is NEVER too late to start trying to build your fortune in the stock market. Our expert Motley Fool analyst team have shortlisted 5 companies that they believe could be a great fit for investors aged 50+ trying to build long-term, diversified portfolios.

Click here to claim your free copy now!

A high P/E should signal quality

However, successful British fund manager Terry Smith recently said that a high P/E will not necessarily lead to future disappointment. This is because many companies doing well today previously had a high P/E and it would have been a mistake to avoid them for that reason alone. When a company looks strong and offers consumers and shareholders value, it could continue to do so.

A price-to-earnings ratio is calculated by dividing the current stock price by its earnings-per-share (EPS). When a company’s earnings increase, then the P/E will usually reduce. 

The reason a company achieves a high P/E in the first place is because a deluge of investors buying it drives its share price up. If that many people believe in the stock, then surely this should signal a quality company? I think that’s what’s happened in AstraZeneca’s case.

Is the AstraZeneca share price too expensive?

The AstraZeneca share price has skyrocketed this year as it gets set to battle Covid-19 via its vaccine collaboration with Oxford University. AstraZeneca has a fantastic array of medicines already available and many more in the pipeline. It provides diversification through its variety of treatment types, and is enjoying product sales growth. It also offers a dividend yield of 2.5%, which may tempt long-term investors looking to add dividend stocks to their portfolios.

The trouble with pharma companies is they’re up against several factors, not least being a competitive marketplace. The economic backdrop can significantly influence share price volatility. And there’s always the risk of failed trials, adverse reactions to drugs and massive costs in research and development. Last week AstraZeneca halted its Covid-19 vaccine trial to investigate a bad reaction in one of its participants. The trial has now resumed, but it highlights the risks involved when dealing with people’s health.

AstraZeneca’s R&D department is world leading and advances in technology are helping it break down barriers. It’s pumping a lot of money into R&D, which stands to pay off handsomely if it results in ground-breaking medicines to tackle the world’s worst health problems.

AstraZeneca shares have high price-to-earnings ratio
Source: AstraZeneca – New Cambridge R&D Centre and Global HQ

So, are AstraZeneca shares worth buying? I think for the long term they probably are. I do think they’re expensive today, but risk aside, it’s an excellent company. If you really believe in a business and like everything it offers, I don’t think you should let its high price-to-earnings ratio put you off. 

Is this little-known company the next ‘Monster’ IPO?

Right now, this ‘screaming BUY’ stock is trading at a steep discount from its IPO price, but it looks like the sky is the limit in the years ahead.

Because this North American company is the clear leader in its field which is estimated to be worth US$261 BILLION by 2025.

The Motley Fool UK analyst team has just published a comprehensive report that shows you exactly why we believe it has so much upside potential.

But I warn you, you’ll need to act quickly, given how fast this ‘Monster IPO’ is already moving.

Click here to see how you can get a copy of this report for yourself today

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Satellite on planet background
Investing Articles

£3.3bn raid sends the Vodafone share price up. Here’s what I’d do

The Vodafone (LON:VOD) share price opened higher on Monday, as news of a big buy from a major investor was…

Read more »

Happy woman with excess weight smiling and dancing alone in sports clothes
Investing Articles

Top British growth stocks for May

We asked our freelance writers to share the top growth stocks they’d buy in May, which included miners and musical…

Read more »

Electric cars charging at a charging station
Investing Articles

A cheap UK share I’d buy for the electric vehicle revolution

This cheap UK share has collapsed in value since I bought last year. But here's why I'm thinking of buying…

Read more »

Stack of British pound coins falling on list of share prices
Investing Articles

3 distressed stocks with huge potential that I’m considering for my portfolio!

These three distressed stocks have performed badly in 2022, but that doesn't mean they won't recover. Here's why I'm considering…

Read more »

Luxury inside of NIO car
Investing Articles

Here’s why I’ve just bought NIO shares!

I've recently bought NIO shares, despite the stock being down nearly 80% over the past year. Here's why!

Read more »

Mature people enjoying time together during road trip
Investing Articles

Is now the time to buy Tesla shares?

Tesla's share price has fallen in 2022 and so has its valuation. Edward Sheldon looks at whether this is a…

Read more »

A graph made of neon tubes in a room
Investing Articles

Are Woodbois shares worth me buying at 4.7p?

Jon Smith considers the recent surge in price for Woodbois shares, and wonders if the move lower last week represents…

Read more »

Shot of a senior man drinking coffee and looking thoughtfully out of a window
Investing Articles

How I’d generate a passive income for life with just £20 a week

Dividend shares can be an excellent way to earn a passive income for life. Our writer discusses a plan to…

Read more »