FTSE 100 biopharmaceutical company AstraZeneca (LSE: AZN) is still around 19% down from its highs of last year. And with the share price near 7,564p the valuation looks modest considering the growth potential on offer.
The forward-looking earnings multiple for 2022 is around 16. And at least three reasons for buying the stock spring to my mind.
3 reasons to buy AstraZeneca stock
Firstly, the business is delivering strong growth in earnings. Over recent years, the research and development pipeline has been spitting out decent commercial pharmaceutical products. And there could be many more to come.
City analysts expect earnings to knock the ball out of the park in 2021 and increase by around 170% year-on-year. Then in 2022, they’ve pencilled in an earnings increase knocking on the door of 30%. Beyond that, we’ll have to wait and see. But AstraZeneca has rediscovered its growth mojo. And the company could be heading for a bright future.
A second reason for buying the stock is AstraZeneca’s modest level of debt on the balance sheet. What you see is what you get with the valuation and it’s not obscured by buckets full of borrowings. FTSE 100 peer GlaxoSmithKline, on the other hand, has a much bigger debt-load to account for when valuing the stock.
A third reason for buying AstraZeneca stock is the consistent record of shareholder dividend payments. One of the delights of the pharmaceutical sector is it tends to have less cyclicality than some other industries.
So, whether the economy is booming or busting, AstraZeneca tends to trade steadily, generating revenue, earnings and cash flow. And such constant finances can lead to a reliable stream of dividends for shareholders, as we’ve been seeing.
A solid-looking business
Right now, the forward-looking dividend yield is close to 2.8 for 2022. I admit that’s not a huge yield. But anticipated earnings should cover the payment more than twice. And it’s also backed by the strong cash flow the business enjoys. If earnings maintain their growth trajectory in the coming years, I think there’s a good chance we’ll see some decent annual rises in the dividend ahead.
I reckon the pandemic has underlined how vital the pharmaceutical sector is to society. So I’d be keen to get a solid-looking business such as AstraZeneca into my long-term diversified portfolio.
However, things may not work out as I hope for the business. Just a few years ago, for example, AstraZeneca was posting annual declines in earnings and battling a loss of revenue and profits because of patents running out. The so-called patent cliff faced by big pharmaceutical companies was well reported at the time. If the business stops posting earnings growth again, the valuation may start to look toppy and we could see share price declines leading to a losing investment in the stock.
But all shares come with risks. And in this case, I’d embrace the dangers and balance them against the firm’s growth potential. My plan would be to hold the stock for the long term.
But I'd also consider these:
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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.