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Why I’d avoid the AstraZeneca share price and buy this FTSE 250 dividend stock

Pharmaceuticals giant AstraZeneca (LSE: AZN) should be the kind of FTSE 100 dividend stock you can buy, safe in the knowledge it will provide reliable income and some growth.

I quite like having a few shares like this at the core of my portfolio, but I don’t own any AstraZeneca. So why not?

The short answer is that I’m not comfortable with the firm’s valuation, nor its performance. It has failed miserably to provide any growth in recent years. The firm’s reported operating profit was $3,677m in 2017. That’s 55% less than the $8,148m reported for 2012.

The period since has seen many of the company’s main products lose patent protection and suffer falling sales. AstraZeneca’s former management had failed to invest in renewing its pipeline of new medicines, so current chief executive Pascal Soriot had his work cut out when he took over in late 2012.

In an effort to speed up the research and development process, Mr Soriot has spent a lot of money. The group’s net debt has risen from $1,369m at the end of 2012 to $16,185m at the end of September 2018.

A turning point?

He has always said that this would be a long process. But in November he said that the company had finally returned to sales growth, thanks to “new medicines and emerging markets”. Emerging market sales rose by 12% during the third quarter, US sales were 25% higher and China sales climbed 32%.

This increase translated into an 8% rise in product sales for the period, but profits were still down by 37% compared to the same period one year earlier.

The good news is that City analysts agree with Mr Soriot’s view that 2018 marked a low point. Consensus forecasts indicate that adjusted earnings are expected to have fallen by 21% to $3.38 per share last year, but will climb 10% to $3.76 per share in 2019.

I wouldn’t argue with this view. But AstraZeneca shares now trade on 19 times 2019 forecast earnings and offer a dividend yield of 3.9%. In my view, a lot of good news is already in the price. I think the shares look expensive, so I won’t be investing at this time.

A reliable performer?

One company that does tempt me is convenience food specialist Greencore Group (LSE: GNC). This firm’s main line of business is pre-packaged sandwiches, but it also produces a growing range of other ready-to-eat foods.

Greencore shares edged higher today after the company issued a positive trading statement. Management said that the group’s UK operations are performing as expected and that underlying sales rose by 5.8% to £363.5m during the period.

The group surprised investors last year by selling its US operations, which had previously been billed as a big growth opportunity. I’m not too concerned by this U-turn. The UK business is a proven performer with good market share and a track record of growth.

Selling the US operations left the group debt-free at the end of December. Earnings from the remaining business are expected to rise by 5% in 2019 and by a more wholesome 20% in 2020. With the shares trading on 12 times forecast earnings and offering a 3.1% yield, I think now could be a good time to take a closer look.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Greencore. 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.