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Why I’m considering FTSE 100 income and growth champion AstraZeneca plc

AstraZeneca (LSE: AZN) has long been considered be one of the FTSE 100’s top income stocks. However, in recent years the company’s growth has faltered as a number of its most profitable treatments have come off patent. Management has been doing everything in its power to try to revitalise growth prospects, and it looks as if these efforts are starting to pay off.

At the beginning of May, the company received approval from the US Food and Drug Administration for the sale of what it has labelled the “cornerstone” of its immune-oncology portfolio. The treatment, which is named durvalumab is expected to generate sales of more than $1bn per annum for the company, making it a so-called blockbuster treatment.

All change

Durvalumab is the first of several key drugs Astra is planning to launch over the next few years, following a strategy championed by CEO Pascal Soriot.

Unfortunately, after several years at the helm of Astra according to news reports out today, Soriot is contemplating taking up a new role as the head of Israel-based Teva Pharmaceutical Industries. Soriot has been Astra’s CEO since 2012 and saw off a takeover attempt from US peer Pfizer, which drew plenty of criticism at the time. And it looks as if he’s planning to bail out from Astra before his mission to double sales to $45bn from nearly $24.7bn in 2015 (when Soriot set this target after rejecting Pfizer’s advances) is hit.

Shares in Astra have fallen around 5% today following the news of his potential departure, a decline that seems to be entirely justified as it looks as if he has given up on the company. That being said, I believe this might be the perfect opportunity to buy into this growth story.

Slow and steady growth

Astra has come a long way from where it was when the Frenchman took over, and City analysts are expecting earnings per share to grow by 19.4% this year followed by growth of 1% next year after several years of stagnation. Through to the end of the decade, the company is expected to return to steady growth as new treatments are approved, and the impact of patent expirations become less pronounced. This year’s growth will be fuelled by sterling’s depreciation, so even though growth is expected to return it will not be organic. Over the next two to three years organic sales growth from the issue of new treatments should start to filter through.

As growth picks up, investors will be paid to wait as shares in Astra currently support a dividend yield of 4.2%, and the payout is covered 1.5 times by earnings per share.

Too expensive?

The one fundamental aspect that does make me think twice about buying a stake in Astra is the company’s current valuation. Specifically, shares in the firm currently trade at a forward P/E of 17 and while this multiple does seem suitable considering the earnings rise of 19% predicted, when growth returns to more normal levels next year, the shares will become overvalued.

Still, as a highly defensive business I believe it is worth paying a premium to buy into Astra’s growth story and with this being the case, after today’s declines, I’m taking a closer look at the business.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. 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.