AstraZeneca Versus The FTSE 100 – Which Is Better?

19th Jul '11 by UK Value Investor

9 comments 5499 reads

If you're going to be a stock picker then one of your goals has to be to beat the market. It must be, otherwise why would you bother with all the extra work? And if you're out to beat the market then it makes sense to check each potential investment against the market to see which is best.

The FTSE 100 is a great investment

Just to recap, the FTSE 100 (via an ETF or index fund) is a pretty fantastic investment to start with since it always pays a dividend, the earnings almost always trend upwards over the longer term and it's virtually certain to be around when you retire so the risk of losing all your money is almost zero. Many studies have shown that for UK investments it's almost impossible to beat over the long term.

Why pick AstraZeneca?

Astrazeneca (LON:AZN) has been scoring very well on my screens for a while so it was due a review and I'm also looking to buy something as well. It's a very large, globally diverse company and it's in the FTSE 100 anyway, so it's not like we're comparing the FTSE 100 with some crazy micro-cap start up. It's a big, stable company with tens of thousands of employees earning billions in revenue and profit. The gap between the FTSE 100 and AstraZeneca is about as small a gap as you're likely to get between an index and a single company so the comparison is fair I think.

Checking past performance

Both have more than 10 years of positive earnings with no losses and no periods without a dividend, so both have good stable histories. Over that last decade the FTSE 100 has grown earnings at about 7% while AstraZeneca has managed about 12%. Dividends have increased for both at sustainable levels with the dividends covered more than 2 times in each case. The FTSE 100 has managed to return almost 10% on retained earnings while AstraZeneca has managed over 20%. Retained earnings are that bit of the earnings that management has kept back (they are your earnings since you are the shareholder and owner) and invested them within the company. Since it's your money you should want it re-invested at the highest rate possible. In summary, AstraZeneca has had better earnings growth than…

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Peter Lawrence

27th Jun '19

Perfectly sound reasoning but i want more info on AZN's near future prospects/positive /negative before investing for 5 years

DeltaCharlie

22nd Oct '19

I like your reasoning, particularly as I have 10% of my portfolio in AZN. The issues I see with AZN are firstly pharma R&D is highly uncertain and your projections are very dependent on the continued success of their new projects. Secondly AZN has built up a lot of, currently cheap, debt. Should interest rates rise or there be another breakdown of the financial system they are very exposed. On the positive side, we took a big bet about five years ago on the success of that R&D and so far it is paying off.

pka

Hi John,

Good article.

I think you should have pointed out that investing in an index fund or ETF tracking the FTSE 100 on its own is much less risky than investing in AstraZeneca on its own. Investing in a diversified portfolio of, say, 20 stocks including AstraZeneca is a different matter, of course, and the risk of that portfolio may be similar to that of the FTSE 100. This is probably well known to most Stockoperida subscribers but possibly not all of them.

I don't think you're correct when you wrote: "Many studies have shown that for UK investments it's almost impossible to beat [the FTSE 100] over the long term." This is because I think the FTSE All Share index and FTSE 250 index have both beaten the FTSE100 over the long term.

smegster

Very interesting article.

I've just had a quick look at the 2009 and 2018 AstraZeneca (LON:AZN) annual reports (the English version, not the Swedish ones!) . I'm unable to reconcile some of your numbers

Reported diluted earning per share
2009 $5.19
2018 $1.70

So over the last decade earning per share seem to have declined on average 10% per year, while you state that they has grown 12% per year. Am I doing the calculation wrong?

23rd Oct '19

The more I look at the numbers in the article the less they seem to make sense for example

"the average PE of the last few years (14 for the FTSE 100 and 13 for AstraZeneca)"

The Stockopedia page for AstraZeneca (LON:AZN) says that the PE was 79 in 2018, so how could it possibly average out to 13 over the last few years?

"Dividends have increased for both at sustainable levels with the dividends covered more than 2 times in each case."

The 2018 AstraZeneca (LON:AZN) annual report states that "Against Core earnings per share the Group had a dividend cover ratio of 1.2:1in 2018 (2017: 1.5:1)." (page 86). So the dividend cover ratio is not over 2.

underscored

Dividends have not been covered by free cash flow since 2014. So dividends are paid out of increasing debt load. They also had to go to the market to buy the rights to develop a new drug, but actually requested more money than the deal required, (hidden rights issue?). I don't think innovative pharma should be paying regular rising dividends, pharma is too boom and bust... https://www.bloomberg.com/opinion/articles/2019-03-29/astrazeneca-daiichi-sankyo-cancer-deal-hides-a-rights-offering

Nick Ray

The article was written in 2011. That is why the numbers don't match up with now.

Thanks Nick, now that makes sense. AstraZeneca (LON:AZN) is a very curious share, as the fundamental deteriorate, the share prices just seems to go higher and higher, I wonder how long this can go on for...

24th Oct '19

As of today, the bets on AZN are paying off with sales and profit rises above expectation.

AstraZeneca versus the FTSE 100 – Which is better?

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