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Will AstraZeneca continue to outperform in 2019?

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Many investors will have been burned in 2018 as the FTSE 100 fell by around 12%, however, some companies bucked the trend and saw their share prices rising despite that overall market fall and despite Brexit concerns.

AstraZeneca (LSE: AZN) was one such company. Over the course of 2018, the share price rose by over 13.5%, while FTSE 100 peer GlaxoSmithKline also grew its share price by 11%. This shows above all how investors were seeking defensive stocks to help shield them from the increased market volatility and political uncertainty.

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The conditions that caused investors so much anxiety in 2018 (Brexit, trade wars) are likely to persist into at least the first part of 2019 and that should benefit defensive companies in industries like energy and pharmaceuticals. Even over a longer timeframe, AstraZeneca should be able to provide market-beating returns to investors due to its drug pipeline and dividend.

A sustainable, growing dividend

Given that its share price has been rising, its dividend yield isn’t the highest, but in many ways, this is a positive sign as a low P/E and high dividend yield can be a warning sign of danger ahead. Investors should take confidence in the firm’s sustainable 3.5% dividend yield. The dividend cover of around 1.5x (and the fact that the dividend has been held while the drugs pipeline is rebuilt after a series of patent expiries) should reward investors going forward. Furthermore, the stated aim of the company’s management is for the dividend to be progressive, which means that as the company makes more profit, the dividend should grow. 

Finding the next blockbusters

Overall AstraZeneca has around 150 projects in its pipeline. The oncology unit where the company is focusing more and more of its resources has 34 pipeline treatments that have already been submitted for approvals or are at phase three of the approvals process, meaning there is significant potential for finding the next blockbuster drug. Other treatment areas, including cardiovascular and metabolic diseases and respiratory, also have many drugs in the pipeline that are edging close to final approvals. 

Given the huge R&D expenditure and focus on specific therapy areas as well as building up its pipeline, it seems likely the firm has a good chance of finding blockbusters to replace drugs that are no longer protected by patents from generic rivals.

Attractive industry, attractive business

Margins in the pharmaceutical industry tend to be very high and AstraZeneca is no exception to this. The H1 results for 2018 showed the gross margin was a very healthy 78.6%, although it had dropped slightly. The company also highlighted that new medicines and emerging markets were performing particularly well and were sources of growth, which is an encouraging sign for investors. 

Full-year results are out next month, and this will provide the first insight into how 2019 might look for the company. Based on the information we have to date and the share price performance, investors ought to be optimistic about the prospects for the company over the next 12 months and beyond.

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Andy Ross has no position in any of the 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.

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