It still amazes me how much time investors spend following the news. In the investing world, it it common knowledge that news is noise and we should not let the mainstream media dictate our investment strategy and portfolio composition. But time and again, this is what we see playing out. When the news is positive, people are quick to hit the buy button. And when the news is negative, they are quick to press the sell button. And right on queue, the imminent Brexit vote and the so called consequences of a leave vote have left investors running scarred and sent the markets into a tailspin. Even though I have written before that a Brexit vote would not lead to any business changes, investors have been swayed by the news and are selling equities so much so that the yield on German bonds have become negative for the first time.
The current selling activity has presented a great opportunity for individuals to buy shares at attractive valuations. The FTSE100 is already cheap and has just got a whole lot cheaper this past week. As such, I have been keeping my eyes firmly glued at my stock watch-list and have pressed the buy button one the price has come within my intrinsic value calculation range. For long-term investors, this is the time to buy.
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” Warren Buffet
On Tuesday, I bought shares in Astrazeneca and BT group. I will discuss the logic behind my Astrazeneca purchase in this article and will write a separate piece at a latter date in regards to my BT purchase.
Pharmaceutical industry in the face of Brexit
AstraZeneca, like many other pharmaceutical shares have taken a bigger hit than most over the past few days. The fear is that a vote to leave the EU will change the landscape of the pharmaceutical industry in the UK due to the potential relocation of two giant bodies, the European Medicine Agency and New Patent Court, away from London. Apart from losing these two industry bodies, the threat is that pharma companies will have to deal with added regulation and jump through more hoops in order to get products approved for use in both the UK and the EU as they will be separate markets.
As an investor, the two points are blown out of proportion. In respect to the first point regarding the relocation of the two pharma bodies, this would affect employees rather than multinational corporations such as AZN or GSK. I can foresee job losses due to the relocation of these trade bodies and R&D facilities of other multinational companies following suite. But from a companies standpoint, business will go on as usual
Regarding the second point of added regulation, this can be circumvented. Countries like Norway and Iceland which are not part of the EU but part of the European Economic Area (which UK will still be part of) only follow the rules set out by the European Medicine Agency. Britain can do the same and pharmaceutical companies can benefit this would reduce any costs associated with regulation.
Fears relating to UK pharmaceutical companies have been overblown and share prices of these companies are trading at decent valuations.
AstraZeneca looks a solid long term play with a healthy pipeline
AZN has had a torrid time over the past few years. Due to the patent cliff (expiry of trademark drugs), revenue has dropped from $28.8 bn in 2013 to $24.7 bn last year and the earnings per share has also dropped from $5.05 in 2013 to $4.26. Cheaper more generic pharma manufactures have been eating into the market share of AZN’s biggest blockbuster products.
Although sales at the company have been falling, the management team at AZN have been great and they were able forecast this decline in sales and take the required measures. This led the company to change its strategy and since its implementation, the company has acquired some great products as well as invested heavily in Research and Development. The company now has one of the most exciting drug pipelines in the industry.
We can already see the transformation starting to take shape as the company has recently returned to growth. Whilst the majority of the drugs will only start to come on the market from 2017 onwards, AstraZeneca is rewarding patient shareholders with a chunky 5% dividend yield. So whilst I envision that there won’t be much share price appreciation in AZN stock in the near future, the torrents of cash AZN throws of to its investors should keep people like me more than happy. After all, cash flow is the name of the game.
Looking at the Balance Sheet, the company looks to be in healthy shape. The net debt of $7.8 bn is less than two years worth of earnings and this is good for a company with stable, recurring revenue streams. The only concern would be the pension shortfall AstraZeneca currently has – and this is a hot topic at the moment! AZN has a number of defined benefit pension plans and there is a substantial shortfall for this. The company will have to pump more money into the schemes to ensure adequate coverage. But the one good aspect is that AZN has the majority of employees in a defined contribution pension plan and these plans are less worrisome from a company’s standpoint.
My Purchase of AZN – A Hedge against Brexit.
As mentioned above, I bought some AZN on Tuesday. I was able to buy myself 29 shares at a price of £37.66 a piece. Although the title of this article may imply that I bought this stock as a result of Brexit uncertainty, make no mistake, I intend to hold it for the long-term.
I have been following AZN for a while now and have bought the stock due to it being in my intrinsic value range. The price I paid for AZN is one that I am happy with and I believe the dividend it offers is great. Whilst I don’t see the company raising its dividends over this or next year, the 5% yield is very healthy and one that I am content with at the moment.
AstraZeneca is a great stock to buy at the moment because it appears to be cheap and it offers great value. Even in the case of a Brexit vote, where the overall market will fall, I see AstraZeneca holding up better than most other shares due to its defensive properties. Besides, if Astrazeneca falls further, it wouldn’t be the worst thing in the world as it means that I can buy more of this cash-generator for an even cheaper price.
Another great aspect of the stock is that the company sets its dividend in USD ($). So in the instance where there is a vote to leave, I will be consoled by the fact that I will get an automatic dividend increase. This is because a Brexit result will cause the GBP (£) to plummet against major currencies. This means that the USD will be able to buy more GBP than before. Thus instead of getting £53 in dividends from AZN for the year, I could get £60 or even more depending on how far the pound falls. In short, the AZN dividend acts as a a natural hedge against a Brexit vote.
With the purchase of AZN, I have further diversified my portfolio. Although I bought a £100 worth of Valeant, AZN is the first major healthcare company I have bought. With the global economic outlook getting more bleaker by the month, I will keep my eyes firmly focussed on those defensive dividends stocks and make a purchase whenever they reach my valuation range.