Looking for shares to buy and hold forever usually means seeking the best FTSE 100 companies I can find, typically mature ones paying well-covered and progressive dividends. The sector matters too — I don’t want exposure to anything remotely fashionable or dependant on local economies, and I want must-have goods or services.
But even companies like that can suffer downturns, and require a steely nerve to hold on to through thick and thin.
Pharmaceuticals giant AstraZeneca (LSE: AZN), I think, fits all of these characteristics, and it challenged investors when the loss of some key patents coupled with insufficient spend on its development pipeline led to earnings falls.
You might have been tempted to sell out when the difficulties first came to light with a plan to buy back in when you saw evidence of earnings growth returning. But there are two perpetual difficulties with that approach. One is that timing the market for the best exit and entry points is notoriously difficult, and it’s easy to lose out by getting it wrong. The other is that, by concentrating on the ups and downs of the share price, you can take your eye off dividends — and for me, those are of greater importance.
But by being selective with the timing of buys and sells, could you have doubled your money on AstraZeneca in the past decade? Well, you wouldn’t have needed to, because AstraZeneca shares are up 166% over 10 years. And if you can smash the doubling barrier so comprehensively without even paying any attention to what’s happening, I reckon you’re a lot better off going out and enjoying life rather than agonising over price charts and earnings reports.
What’s more, you’d have a bunch of dividends to add to your returns, which would have pushed you to a trebling of your stake, especially if you’d reinvested the cash in new AstraZeneca shares as the price was rising.
But what of the next decade and the next doubling in price?
I start off by looking at the appreciation you can get from dividends alone, and the forecast yield for AstraZeneca currently stands at an unexciting 3%. It’s been held static during the turnaround years, and the rising share price has put pressure on the yield.
If both the share price and the dividend were to remain static, a 3% yield compounded by reinvestment would take 24 years to double your money, and there are definitely yields on the Footsie that would achieve the same a lot quicker. But I can’t see either of those standing still.
Dividend cover by earnings was weak in 2018 at just 1.24 times, but with EPS forecast to rise by 22% over the next two years, we’d reach cover of 1.5 times by 2020. I’d expect AstraZeneca to keep the dividend pegged for perhaps a couple more years, but if the expected return to sustainable earnings growth really is on, I think we’ll soon see a return to progressive dividends too.
And though the shares are on a relatively high P/E of around 26 now (down to 23 on 2020 forecasts), that could drop quite quickly and lead to further share price gains. Another doubling over the next 10 years? I think there’s a very good chance.
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Alan Oscroft 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.