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Smart Investor: why I like shares in AstraZeneca
Pharmaceutical giant AstraZeneca (AZN.L) has had a difficult year, losing its chief executive in the first round of the 'Shareholder Spring' revolts. Yet Smart Investor is pleased with its financial performance.
Pharmaceutical giant AstraZeneca (AZN.L) is one of the biggest dividend payers on the FTSE 100, but will the looming 'patent cliff' hurt future performance?
FTSE 100-listed AstraZeneca (AZN.L) is the 13th-biggest listed company in the UK, with a market capitalisation of £37.2 billion.
Formed in 1999 through the merger of Sweden’s Astra AB and the UK’s Zeneca group, AstraZeneca researches, develops, manufactures and markets prescription medicines for six important areas of healthcare: cancer, cardiovascular, gastrointestinal, infection, neuroscience, and respiratory and inflammation.
It currently employs 57,000 people in Europe, the Americas and Asia, and last year invested about $4 billion in research and development.
AstraZeneca’s performance over the past five years has been highly impressive, with the company profitable in all five years. Net profit has grown at an annualised rate of 12.3% over the period, hitting around £6.4 billion in 2011 (all figures assume an exchange rate of £1 = $1.55).
This equates to a quite superb return on equity (ROE) of 42.9% last year and an average ROE of 38% over the past five years.
Such returns are made all the more impressive when AstraZeneca’s capital structure is taken into account. Debt levels are moderate, meaning the debt-to-equity ratio is just 40%, and interest cover is a very healthy 29.5.
The company benefits from a very substantial economic moat in the form of patents for the drugs it produces. Furthermore, substantial regulation and the aforementioned research and development costs prevent most potential new entrants from competing on a significant scale.
As for dividends, AstraZeneca currently yields around 6% from a very comfortable payout ratio of 38%. The company is ranked sixth on the FTSE 100 top yielding list and, as mentioned, its dividends are well covered with scope to significantly increase the payout ratio.
Furthermore, dividends per share have increased at an annualised rate of 8.4% over the past five years, which offers further encouragement for income seekers.
Free cash flow is healthy, averaging £5.4 billion over the past five years versus average net profit of £4.8 billion over the same period.
Is it good value?
In terms of value, a price-to-earnings ratio of just 6.25 is incredibly cheap, and a price-to-book ratio of 2.54 is also perfectly acceptable, meaning the shares appear to offer excellent value at the current price of £29.47.
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