Well, it looks like it’s finally safe for AstraZeneca (LSE: AZN) (NYSE: AZN.US), now that Pfizer has formally ended its bid approach.
Some will be disappointed at their failure to grab a quick short-term profit, but I’m happy to see the long-term approach taking by chief executive Pascal Soriot and his management team winning the day.
The position of AstraZeneca’s board is that the company will provide better rewards for its shareholders over the long term as an independent company rather than as a tax-avoiding ruse for Pfizer. But what could it actually be worth?
Show us the money
With a 16% fall in earnings per share (EPS) forecast for this year ahead of a 2% fall for 2015, it’s pretty hard to quantify right now. A return to earnings growth in 2016 is expected by many, but what numbers could we guess at?
Over at rival GlaxoSmithKline, the City’s analysts are predicting a 10% rise in EPS for 2015, and I don’t think that would be too stretching for a “What if?” scenario at AstraZeneca.
So, what if those two years of drops of 16% and 2% are followed by eight years of 10% growth per year? After the full 10 years, we’d be looking at an EPS figure of around 529p — more than twice the figure forecast for 2014.
At today’s share price of 4,225p (still boosted from pre-takeover levels), that would produce a final price to earnings (P/E) ratio of just 8, which would be well below the FTSE’s long-term average of 14. To revert to that average, the price would have to rise to 7,406p — well above Pfizer’s offer of £55 per share.
Dividends too
On top of that, we’d also be getting a nice stream of dividends. The annual payment has been kept unchanged for three years in a row, but a return to growth is definitely part of the plan. If we suppose the dividend will grow by 10% per year in 2016 and beyond, we’d end up with a total of 2,461p per share in cash to add to the pot.
So, each AstraZeneca share bought for 4,225p today could return a total of 9,867p — nearly two and a half times the initial investment.
Think that’s too optimistic?
The bearish view
Well, if we went with a lower 5% per year from 2016 on both earnings and dividends it would suggest a total return of 7,123p per share, and that would be a lot closer to justifying Pfizer’s offer. But I’d really be surprised if that’s all that Mr Soriot’s reform of AstraZeneca achieves.
