AstraZeneca is a great business, but is it a great investment?

9th March 2012

Pharmaceutical giant AstraZeneca is a great business but is it a great investment? The answer of course depends on when the investment is made. Today you can pick up the shares at about £28, which is not much of an advance on the £25 at which they were trading in 2000. At first glance, the group therefore looks to have been a poor investment this century, doesn't it? Well, yes and no.

‘No' because, over the last 12 years, AstraZeneca has generated a great deal of cash, a lot of which it has returned to shareholders in the form of dividends and share buybacks. As such, while the share prices then and now may be similar, the group has in that time paid $12 (£7.56) a share in dividends and repurchased 23% of its market capitalisation, equating to some two-fifths of the current share price.

‘Yes' because, back in 2000 AstraZeneca's valuation was quite simply too high. At the turn of the century, the business was trading on a one-year forward price/earning ratio (P/E) of 23x. This was principally because investors thought profits would go up a long way – and they did. Profits went up aggressively from $1.80 to $6.12 a share.

People invested in AstraZeneca because they wanted this growth, the growth was delivered and yet the share price is essentially unchanged. Why? It is because of the peril of valuation and, more specifically, overvaluation.

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