When it comes to adding money to an ISA I am looking for company shares that offer value, security, long term success, and a great dividend record. Recently Astra Zeneca has caught my eye because of the low price to earnings ratio and tasty dividend. Astra’s share price is almost the same as it was in year 2000. From then until now you would not be very happy with that share price performance. So why am I thinking about investing in possible value trap? I am really going against the crowd with this one because I can’t find anyone else suggesting it’s a good investment…. not yet anyway.
It all comes down to valuation. It looks undervalued. Let’s look at some of the positive points for adding an investment in Astra Zeneca to the ISA.
- The biotech sector will be an ‘in vogue’ sector again and is indirectly linked to Pharma companies like Astra Zeneca.
- Ageing populations need more drugs.
- High proportion of the business is carried out in the US with lots of profits earned in dollars. The prospects of the dollar is bright, something recently discussed by James Furgesson who writes for Money Week.
- Big dividend and good 10 year dividend history. The dividend is more than twice covered by profits.
- Low PE ratio indicating at recession levels, currently just over 6.
- The biggest negative is the patent cliff. Astra Zeneca does not have block buster drugs in it’s pipeline to replace the ones it has that will begin facing competition from Generic drug makers.
- Negatives about governments needing to save money on drug purchases which will bring margins under pressure.
- Big profit margins. On the face of it this is good, but, they will undoubtedly start coming under pressure.
- Low returns on R&D expenditure.
- An expected drop in profit profits.
- the cost of R&D is increasing.[/unordered_list]
Astra Zeneca themselves have commented that they don’t know where future growth is coming from. The low PE is likely to increase due a drop in profit and profit margins as block buster drugs are not replaced.
The strange thing is that the company value the same as it was in 2000, but, since then the company has produced huge amounts of cash. The long term share price of companies tend to fluctuate within a range of PE ratios either above or below the average. Astra Zeneca is towards the bottom of the range. Over the long term (8 years and more), the chances are this company will produce good capital growth, and provide a cushion of dividends to fall back on.