Monday 6 July 2015

BUY: AstraZeneca (AZN)--Further into Pharma?

Price: 4048.88
Shares: 18
Predicted annual dividend income: £32 (this purchase) and £59 (entire holding)

A couple of you may have noticed that the sad economic plight of Greece has had a teeny-weeny effect on the global markets. The UK market was no different. The FTSE 100 index dropped about 2% on 29 June with a further 1.5% on 30 June. Pretty hefty.

But, of course, the FTSE 100's different constituents each got hit by the sell-off to different extents. Some got hit harder, some less so. But what about my recent buy, AstraZeneca?

Well, AstraZeneca got hit even harder over this period after a fairly consistent price slide in recent times. On 29 June it dropped 2.31% with another 1.9% shed the next day. Pretty shocking to see as a shareholder.

I bought into the company in May after its share price slide--post-Pfizer bid--had seemingly been well developed. From its high of about £49 it had slipped to £44. I must admit that I had not expected to see it a little over a month after dropping to its 52 week low just above £40.

However, these are the opportunities that a long-term dividend investor is looking for.

It actually took me two days to hit the buy button. First because I wanted to see how things developed as it was clear that markets were not finished selling off yet. But also because so many opportunities had shown themselves. My options, really, boiled down to this:
  1. Top-up my AstraZeneca holding (down 9% since purchase);
  2. Top-up one of my insurer holdings. Either Legal & General (down 8%), Old Mutual (up 6%) or--less likely--Amlin (down 6%).
  3. Open a new position. Rolls Royce, in particular, caught my eye.
In the end, I went for option 1 and bought AstraZeneca on 30 June. But why? Let's take a look.

What is AstraZeneca?

Most of us are probably familiar with AstraZeneca. They research, develop and sell pharmaceutical drugs. However, recently they have been faced with patent expirations (especially the cholesterol drug, Crestor) which have of course severely affected earnings.

But they are in the process of some pretty significant research successes. What is particularly exciting is that a series of immuno-oncology drugs (including Lynparza, AZD9291, & MEDI4736) which uses the patients own immune system to fight cancer. If successful this is, of course, good for patients and profits.

This takes time though. Most agree that it is not until 2017 that we will see the pharma giant back in growth.

However, in the meantime, Astra is still a highly attractive company in general.

Good Value

So how does Astra look with regards to value? Well, a quick look at the earnings profile is not that encouraging. Since 2011 the earnings per share (EPS) has dropped about 16% per annum. What is more, as we shall see growth is looking a little elusive in the short term.

For instance, let's take a look at the analyst predictions for this year:

EPSP/E Ratio
Difference (%)31.74

Now, this means there is a predicted c.2% drop in earnings predicted according to the consensus predictions. Although some analysts are anticipating the possibility of earnings growth this year. That being said, the consensus earnings per share would throw off a PE of 15. For me, that is very reasonable indeed.

For the lowest prediction, however, this would see EPS fall by about 20% leaving us on a PE of 19. That obviously is less attractive.

And for next year?

EPSP/E Ratio
Difference (%)22.86

Again, the consensus is for a small drop in earnings per share of about 1.5%. This throws off a PE of 15.2 which still remains pretty solid in my eyes.

However, the lowest EPS predictions is where it gets interesting. Here there is a 13.5% growth over the lowest predictions of this year anticipated. This leaves a PE of 16.7: much lower than 19. 

This is why AstraZeneca is attractive. Clearly growth is a struggle at present with its blockbuster drugs coming off patent. But as the new drugs in development get approval and go for sale we should see a noticeable earnings jump. 

Dividend: Size and Safety

The dividend is a big appeal for many. It has been held at $2.80 since 2010. During that time earnings cover has dropped from about 2.6 times to 1.53 times. Not the best record, maybe.

At present, most people anticipate the same from Astra for the next couple of years until earnings growth has bedded in. This does seem likely and a cut unlikely as it is very closely linked to executive remuneration.

As such, shareholders can probably expect to receive the same $2.80 in dividends this year and next. This--at current exchange rates--represents a yield of about 4.46%. Very nice indeed.

What is more, unlike GSKs dividend, it looks pretty well covered during that time. If we take consensus estimates of EPS this should be covered about 1.5 times by earnings this year and next. With the lowest estimates this is a much thinner dividend cover  of 1.18 for this year and 1.34 for next. Nonetheless, this is--for the short term--a pretty nice cover.

Other Numbers

Astra's dividend is not the only highlight, however. The company also have a pleasingly low debt profile. With debt of $10.8 billion, its debt to equity ratio is a very moderate 0.55 (much lower than GSKs). 

What is more, their cash position is very strong. They have about $6 billion in cash on the books. This is about 315p per share (or 7.7% of the share price). It is encouraging to see such a cash-rich (and low debt) company and means it should have enough fire-power to continue to research and develop its products and pay its dividends.

AstraZeneca and My Goals

So how does AstraZeneca look alongside my investing goals for the year? Pretty good, actually.

Its predicted yield of about 4.46% should keep me on track to reach my goal of having a portfolio yield around 1.25 times the FTSE All Share yield. At present the FTSE All Share yield is about 3.4% which produces a target of 4.25%. Obviously, Astra will help me edge my yield higher as a result.

Astra is also in a highly defensive sector. As a result it has a Beta of around 0.5 at present. As such, it helps me a little along the way to achieving my target of a portfolio Beta of 0.85 or less.

And how about my goal for getting my trading fees down to below 1.3% for the year? Well, being a larger transaction it means that the fees in this transaction amounted to just 1.17% of the transaction cost. Not bad.

I have missed Astra's second interim (that is, final) dividend for the 2015 calendar year. However, I will receive the smaller first interim in 2015. 

This--likely being $0.90--should see a further £10 or so added to my dividend total for this year. Not bad. And it will certainly help me to reach my target of getting £800 or more from dividend income this year.

Final Thoughts

Overall I am very happy with my top-up of AstraZeneca. I have bulked up my exposure to healthcare companies, added a dividend stalwart at discount prices and looking like it is well on its way to enter a new purple patch in earnings. If it continues to sit at current prices I may be tempted to add more.

What do you think? Have you been tempted by AstraZeneca or pushed your investing capital elsewhere? 

Analyst Views

Here are some of the latest analyst opinions on AstraZeneca. I don't generally look at these before buying into a company. But some of you may find them interesting. 
  • Berenberg--Buy--5200p.
  • HSBC--Hold--4640p.
  • JP Morgan Cazenove--Neutral--4400p.
  • Deutsche Bank--Hold.
  • Kepler Chevreux--Reduce--3700p.
  • Exane BNP Paribas--Outperform--5800p.
  • Jefferies International--Buy--5600p.

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[Creative Commons image reproduced from Flickr user Cheshire East Council]


  1. Congrats on the purchase. Many U.S. investors are stepping into GILD, based upon their apparent undervaluation and are taking even more advantage with the markets getting taken down on Greek issues.

    Would like to see Astra put forth an increasing dividend...


    1. Welcome, Grant!

      I agree. It would be nice to see their progressive dividend policy progressing a little soon! Though I am content that it should return sometime soon as earnings look like they are readying to get growing again soon.

      Yes, I have seen a lot of interest in Gilead in recent weeks (and months, in fact). I know very little about them. But their pipeline looks pretty solid. The boom/bust cycle is--of course--par for the course for these companies. Have you got a position in GILD?

      Astra seemed very unfairly hammered by the Greek context. The news-flow has been consistently positive. That being said, there was still some residual "over-valuation" from the Pfizer bid so perhaps the Greek crisis flushed this out briefly!

      We will see. Astra is now my fourth largest holding. Hopefully it will serve me well over the years.

  2. Replies
    1. My pleasure, Paul. Glad you found it of interest!