Is AstraZeneca The Ultimate Retirement Share?

Published in Company Comment on 21 August 2012

Will shares in AstraZeneca help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at AstraZeneca (LSE: AZN) (NYSE: AZN.US), the UK's second-largest pharmaceutical company. AstraZeneca has been less successful than its peer GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) in negotiating the patent cliff and is still in transition, but offers an attractively high yield and has plenty of cash.

Patent earning power

Let's take a look at how AstraZeneca has performed against the FTSE 100 over the last 10 years:

Total Return20072008200920102011Trailing 10 yr avg.
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.7%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Despite all the doom and gloom around AstraZeneca's recent performance and looming patent expirations, it has outperformed the FTSE 100 over the last 10 years on a total returns basis. However, future headwinds in terms of earnings growth remain a concern.

What's the score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how AstraZeneca shapes up:

Year founded1999*
Market cap£37bn
Net debt£5.9bn
Dividend Yield6.0%
5 year average financials
Operating margin32.8%
Interest cover10.3x
EPS growth14.3%
Dividend growth10.2%
Dividend cover2.6x

Source: Morningstar, Digital Look, AstraZeneca

*Founded when Astra AB and Zeneca group merged.

Here's how I've scored AstraZeneca on each of these criteria:

LongevityA young company but its component parts are much older.3/5
Performance vs. FTSEOutperformed in recent years but can it continue?4/5
Financial strengthIn good health.4/5
EPS growthEPS is expected to fall this year, breaking the recent trend.3/5
Dividend growthHigh yield and above-inflation growth rate, sensibly covered.5/5
Total: 19/25

A score of 19/25 is strong and suggests that AstraZeneca could be a good candidate for a retirement fund portfolio. The company is still hunting for a replacement to recently-departed CEO Dave Brennan and is likely to have further to go before it can return to stable, long-term growth. However, its P/E ratio of 6.0 already looks suitably discounted against rival GSK's P/E of 12.9, in my opinion.

Expert selections

I'm not the only one who rates AstraZeneca's long-term prospects. This share is one of the biggest holdings of City fund manager Neil Woodford, whose dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years.

Mr. Woodford manages more than £20bn of private investors' money -- more than any other City fund manager -- and his record highlights just why so many investors trust his judgement. He currently has around 47% of his portfolio invested in just eight shares -- including AstraZeneca.

If you would like to find out the identity of Neil Woodford's seven other biggest holdings, then you can do so by downloading this special free report from the Motley Fool, "8 Shares Held By Britain's Super Investor".

Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings. This report is completely free and I strongly recommend you download it today, as it is available for a limited time only.

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Further investment opportunities:

> Roland owns shares in GlaxoSmithKline but does not own shares in AstraZeneca.

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