AstraZeneca plc Could Be Worth 5100p!


2014 has been a storming year for investors in AstraZeneca (LSE: AZN) (NYSE: AZN.US), with shares in the pharmaceutical giant gaining 28% since the turn of the year. This easily beats the FTSE 100’s return of 1% over the same time period. Indeed, although it may be tempting to sell shares in AstraZeneca, they could be worth holding on to and could trade as high as 5100p. Here’s why.

An Improving Pipeline

A key reason for AstraZeneca’s strong share price gains in recent months has been an improving pipeline. Certainly, the company is not ‘out of the woods’ yet, since earnings are due to decline by 14% in the current year. However, AstraZeneca is in a much better position that it was a year or two years ago, with it having made numerous bolt-on acquisitions in that time that have included its partner’s share in the diabetes joint venture.

This and other acquisitions are set to rejuvenate the company’s top and bottom lines over the medium term and there could be more to come in this space. Indeed, with the company having low levels of financial leverage and strong cash flow, it can afford to borrow to buy other companies. This could further enhance its pipeline and cause investor sentiment to improve even further.

Bid Approach

An improving pipeline has meant that AstraZeneca is now of significant interest to rival pharmaceutical companies. So, it was perhaps unsurprising that US rival, Pfizer, made multiple bid approaches earlier this year. Furthermore, with numerous pharmaceutical companies struggling to generate top line growth, it would be of little surprise if there were other bids later this year and in 2015 for AstraZeneca. Clearly, this would be positive news for the company’s share price.

Looking Ahead

Indeed, with a constantly improving pipeline, it appears as though AstraZeneca could afford to be a little more generous with regard to its dividend. It currently pays out around 67% of profit as a dividend which, although not mean, is still some way behind many of its rivals. For example, GlaxoSmithKline’s payout ratio currently stands at 85%.

Were AstraZeneca to pay out 75% of profit as a dividend (which is very realistic given its improving pipeline), it would equate to dividends per share of around 186p in 2015. Assuming shares continue to trade on their current yield of 3.65%, this would mean shares in the company would hit around 5100p. That would represent a gain of around 11.4% from the current share price.

Add to this a yield of 3.65% per annum, plus the potential for more bid approaches, and AstraZeneca could deliver a total return in excess of 20% over the medium term. As a result, it could be well-worth buying a slice of the company.

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Peter Stephens owns shares of AstraZeneca. The Motley Fool UK has recommended shares in Glaxo. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.