The Motley Fool

Are AstraZeneca shares worth buying?

Image source: Getty Images.

Since the stock market crash in March, investors have become wary of which shares to buy. This has resulted in some sectors being avoided and others seeing high demand. Unloved sectors include travel, hospitality, oil and finance, while loved sectors include technology and pharmaceuticals. This has led to a lot of high-quality shares with ridiculously high price-to-earnings ratios (P/E). Think AstraZeneca (LSE:AZN) with its earnings multiple of 104, Avon Rubber at 86 and Games Workshop at 45.

As I consider buying these shares, I worry if a market correction occurs, I’ll have paid too much at a price point that’s unsustainable. This problem is not unique to the UK, it’s even more prevalent in the US, where Tesla has reached an astronomical P/E of 959.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

A high P/E should signal quality

However, successful British fund manager Terry Smith recently said that a high P/E will not necessarily lead to future disappointment. This is because many companies doing well today previously had a high P/E and it would have been a mistake to avoid them for that reason alone. When a company looks strong and offers consumers and shareholders value, it could continue to do so.

A price-to-earnings ratio is calculated by dividing the current stock price by its earnings-per-share (EPS). When a company’s earnings increase, then the P/E will usually reduce. 

The reason a company achieves a high P/E in the first place is because a deluge of investors buying it drives its share price up. If that many people believe in the stock, then surely this should signal a quality company? I think that’s what’s happened in AstraZeneca’s case.

Is the AstraZeneca share price too expensive?

The AstraZeneca share price has skyrocketed this year as it gets set to battle Covid-19 via its vaccine collaboration with Oxford University. AstraZeneca has a fantastic array of medicines already available and many more in the pipeline. It provides diversification through its variety of treatment types, and is enjoying product sales growth. It also offers a dividend yield of 2.5%, which may tempt long-term investors looking to add dividend stocks to their portfolios.

The trouble with pharma companies is they’re up against several factors, not least being a competitive marketplace. The economic backdrop can significantly influence share price volatility. And there’s always the risk of failed trials, adverse reactions to drugs and massive costs in research and development. Last week AstraZeneca halted its Covid-19 vaccine trial to investigate a bad reaction in one of its participants. The trial has now resumed, but it highlights the risks involved when dealing with people’s health.

AstraZeneca’s R&D department is world leading and advances in technology are helping it break down barriers. It’s pumping a lot of money into R&D, which stands to pay off handsomely if it results in ground-breaking medicines to tackle the world’s worst health problems.

AstraZeneca shares have high price-to-earnings ratio

Source: AstraZeneca – New Cambridge R&D Centre and Global HQ

So, are AstraZeneca shares worth buying? I think for the long term they probably are. I do think they’re expensive today, but risk aside, it’s an excellent company. If you really believe in a business and like everything it offers, I don’t think you should let its high price-to-earnings ratio put you off. 

Are you looking for quality growth stocks to add to your Stocks and Shares ISA? Let us help you...

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.