Just 14% of drugs in development (according to a 2018 study) ever make it to market, so investing in pharmaceuticals is a bit of a shot in the dark. And smaller companies that lack any approved drugs and have few drug candidates in their pipelines face a heightened risk of bankruptcy if things don't go their way.
This is why I'd advise most investors to consider only the most dominant and established pharmaceutical companies for their portfolios. British drugmaker AstraZeneca (AZN 0.28%) is one such company. But should growth investors buy the stock now? Let's examine AstraZeneca in further detail to decide.
Decent first-quarter results
AstraZeneca's total revenue fell 4% year over year to $10.9 billion in the first quarter. But considering that the company sells its products throughout the world and the U.S. dollar has been more robust than usual against other currencies lately, this isn't quite the full picture. AstraZeneca's currency-neutral revenue was flat during the quarter.
Another factor that held the drugmaker back during the quarter was a decline in the demand for its COVID-19 products as the pandemic has waned a bit. Factoring this out of the equation, revenue grew by an impressive 15% in the quarter.
AstraZeneca's non-GAAP (core) earnings per share (EPS) edged 1% higher over the year-ago period, to $1.92 during the first quarter. Backing out the impact of unfavorable foreign currency translation, core EPS rose by 6% for the quarter.
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An exceptional product pipeline
AstraZeneca's steady performance in the first quarter may bring up the following key questions for you as an investor: How has the company been able to amass so many hit drugs in its portfolio over the years to drive these results? And can this momentum continue?
With regard to the first question, AstraZeneca has held research and development in high regard for many years. Underscoring its commitment to innovation, the company spent a whopping $2.6 billion on R&D in the first quarter of 2023. This was 24% of its total revenue, quite high for a pharmaceutical company.
So it's no surprise that AstraZeneca had 178 projects in its pipeline as of April 27. One of the more prominent candidates in its portfolio is the respiratory syncytial virus vaccine nirsevimab, being developed in partnership with Sanofi.
And to answer the second question, analysts do think the momentum can continue. The consensus is that AstraZeneca's core EPS will climb by 13.1% annually over the next five years. Because the company invests more heavily than its peers in R&D, it only makes sense that this growth forecast is double the average annual earnings growth prediction of 6.4% for the drug manufacturing industry.
The payout is sustainable
Even with its reputation as more of a growth stock than an income stock, AstraZeneca's current 1.9% dividend yield still beats out the S&P 500 index's 1.7%. And with the dividend payout ratio set to come in below 40% in 2023, investors can be confident that the dividend is quite safe as well. That's because AstraZeneca has enough capital left over after paying its dividend to acquire businesses and repay debt.
A growth stock disguised as a value stock
For a company of its caliber and superior growth prospects, AstraZeneca's stock is arguably undervalued. The stock's forward price-to-earnings ratio of 17.4 is well above the average of 13.4 for the drug manufacturing industry. This is why I believe AstraZeneca is a no-brainer buy for growth investors.
