AstraZeneca has generated a 78pc capital return since we first tipped it as a ‘buy’ in August 2019. This compares with a far more modest 12pc rise in the FTSE 100 index over the same period. And when dividends amounting to 15pc of our notional purchase price are included, the pharmaceutical stock’s total return amounts to 93pc in five years.
While this undoubtedly represents an impressive performance, Questor believes there is far more to come from the UK’s largest listed company. Indeed its latest half-year results showed that it is making excellent progress in implementing its growth strategy.
Total revenue rose by 18pc during the period, with a smaller 5pc increase in core earnings per share, primarily due to gains recognised in the previous financial year. Double-digit sales growth across key product segments – including oncology, respiratory and immunology and rare disease – meant the business upgraded its financial guidance for the full year. It expects total revenue and core earnings per share to rise at a mid-teens percentage rate versus a previous forecast of a low double-digit to low-teens percentage rise.
The company’s improving financial performance means that while research and development (R&D) expense as a proportion of revenue was unchanged at 22pc in the second quarter, it nevertheless increased by 13pc year-on-year. This is set to boost the business’s long-term financial performance as higher R&D spending is likely to ultimately produce a stronger pipeline of new drugs.
And with a solid balance sheet, as evidenced by a net gearing ratio of just 66pc, the company has significant financial strength to maintain a healthy level of reinvestment. Financial strength also provides ongoing scope for mergers and acquisitions. For example, the business acquired Fusion Pharmaceuticals and Amolyt Pharma for up to $2.4bn (£1.84bn) and $1.1bn respectively in the current financial year.
On an organic basis, the long-term growth prospects for AstraZeneca are somewhat unchanged since our initial tip five years ago. The pharmaceutical sector continues to offer significant opportunities for growth as long-standing demographic changes, such as an ageing and growing global population, lead to higher demand for a wide range of drugs.
The incidence of non-communicable diseases such as cancer is still expected to rise in the coming years. With around 40pc of the business’ revenue derived from its oncology segment, it is well placed to benefit from this trend. Furthermore, as 400 million people across the world live with a rare disease, the company’s increasing exposure to this area offers a further long-term growth catalyst.
Indeed, the company is aiming to grow revenue to $80bn by 2030. To put this in perspective, total sales amounted to just under $46bn in 2023. If this long-term target is met, it would represent an annualised growth rate in excess of 8pc over the next seven years. This may not appear to be hugely impressive at first glance. But when viewed alongside the company’s defensive credentials, it means the stock offers a highly favourable risk/reward opportunity at what remains an uncertain juncture for investors.
Certainly, falling inflation and interest rate cuts are set to have a positive impact on equity markets over the coming years. But heightened geopolitical risks as well as increasingly generous valuations following the stock market’s recent rise mean that AstraZeneca’s mix of strong growth potential and its relative lack of cyclicality could prove highly attractive in the near term.
This combination means the company’s shares are likely to remain in demand among a wide range of investors. Although they trade on a price-to-earnings (P/E) ratio of 23.5 – which is high relative to many other FTSE 100 members – in Questor’s view they continue to offer good value for money.
In fact, even after their significant rise over the past five years, the company’s shares trade on a lower rating than at the time of our original tip. Then, they had a P/E ratio of 25.4, with a fall in the company’s rating providing evidence that an improving financial performance, rather than stronger investor sentiment, has been key to the stock’s generous returns.
With a potent mix of defensive attributes and long-term growth potential, AstraZeneca is set to outperform the FTSE 100 index through bull and bear markets alike.
Questor says: buy
Ticker: AZN
Share price (GBP): 13,102p
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