There are only a few stocks in the FTSE 100 that have outperformed the blue-chip index this year. AstraZeneca (LSE: AZN) is one of these. Year-to-date, the stock is up 21.3%, excluding dividends, compared to a loss of 6.4% for the FTSE 100.
Including dividends, Astra’s performance is even more impressive. The stock is up 23.4% in 2018, compared to a loss of 5.4% for the UK’s leading blue-chip index, a total outperformance of 28.8%.
You might think that after this market-beating performance in 2018, shares in Astra are set to lag the FTSE 100 in 2019. However, reckon the firm will continue to lead the index higher next year. Here’s why.
Astra has come a long way since 2014 when US drugs giant Pfizer tried to acquire the business for £69.4bn. When management rejected the £55-a-share deal, a 45% premium over the share price at the time, investors analysts were sceptical that it was making the right decision.
Four years on, and it looks as if management did chose the right path. While the buyout might have delivered a quick return for investors, if you’d invested £10,000 in Astra back in 2014, today it would be worth over £20,000, including reinvested dividends. In other words, shareholders have benefited significantly from the deal not going ahead.
But what does the future hold for the company? Well, 2018 has been somewhat of an inflection year for the firm. After a wave of new treatment launches, for the first time in four years, the group’s sales increased by 9% in the third quarter. On a statutory basis, total revenue for the nine months fell 6% to $15.7bn.
I think this is a sign of things to come. Third quarter sales momentum is set to continue “into the fourth quarter and beyond,” according to Mark Mallon, Astra’s executive vice-president of global product. New medicines and growth in emerging markets have helped offset sales declines in the group’s legacy product portfolio, which includes the former blockbuster blood pressure drug Crestor. Sales of Crestor continue to decline as the product suffers from growing generic competition.
City analysts expect this top-line growth to start benefitting Astra’s bottom line this year. The City has pencilled in earnings per share (EPS) of $3.41 for 2018, up 55.7% year-on-year. EPS are expected to expand further in 2019, growing just under 13% to $3.83.
In my opinion, this earnings growth should convince more investors to return, as the company proves that its recovery is well and truly underway.
What’s more, as earnings expand, Astra’s dividend cover is set to rise to 1.4 times next year. For four of the past five years, the dividend hasn’t been wholly covered by EPS.
With Astra’s income credentials improving, and earnings expanding again, I think it’s highly likely that the stock will continue to outperform the market in 2019. And if it doesn’t, investors are still set to receive a dividend yield of 3.6%, significantly above the interest rate on offer from most savings accounts today.
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Rupert Hargreaves owns no share 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.