One FTSE 100 6% dividend stock I’d buy with AstraZeneca

Roland Head explains why FTSE 100 (INDEXFTSE:UKX) pharma giant AstraZeneca plc (LON:AZN) is on his buy list.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

With the FTSE 100 hitting new highs, finding cheap income stocks is getting more difficult. But I believe there are still some good buying opportunities in the blue-chip index for dividend investors.

I’ve chosen two firms which have consistently beaten the market over the last five years. In my view, both stocks are classic income buys — high quality businesses that should deliver reliable dividends and capital growth for many years to come.

This market can only grow

I think I’m safe in suggesting that the global pharmaceutical market is certain to keep growing over the coming decades. In my view, FTSE 100 firm AstraZeneca (LSE: AZN) is one of the best long-term opportunities in this sector. Unlike some smaller firms, I think it has the scale and diversity needed to provide reliable profits over many years.

The Anglo-Swedish firm’s focus on serious illnesses such as cancer, heart disease and respiratory problems should offer plenty of opportunities for growth. As my colleague Royston Wild noted earlier this year, two of the company’s newer products, Farxiga and Brilinta, reached blockbuster status in 2017. This means annual sales of more than $1bn each.

Alongside this, annual sales in China rose by 15% to $2,955m last year, accounting for 13% of all sales. Further growth is expected this year as the group expands into the world’s largest emerging market.

I’d be a buyer

Chief executive Pascal Soriot is targeting revenue growth from $23bn to $45bn by 2023. I’m not sure how successful Mr Soriot will be. But analysts expect the firm’s earnings to return to growth in 2019, with a 17% increase to $3.96 per share.

This figure puts the shares on a 2019 forecast P/E of 18, with a prospective yield of 3.9%. I think this could seem cheap in a few years. For investors seeking a long-term income, I’d rate the shares as a buy.

More of the same, please

AstraZeneca’s future growth does depend on the success of Mr Soriot’s strategy. By contrast, insurance and investment firm Legal & General Group (LSE: LGEN) already has a proven strategy. Expansion into areas such as property investment and bulk annuities have paid off, and the firm’s profits have doubled since 2013.

For income investors, the big attraction is that this business generates a lot of cash. Much of this is returned to shareholders, while the remainder supports steady growth. In 2017, operating profit rose by 32% to £2,055m, as return on equity climbed from 18.8% to 25.6%.

As a result of this growth, Legal & General’s continuing businesses released £1,325m of surplus cash to the parent company, 9% more than in 2016. I estimate that about £917m of this cash was paid out to shareholders, giving the stock a trailing dividend yield of 5.5%.

Can this continue?

This rate of profit growth may not always be sustainable. It’s worth noting that Legal & General shares now trade at 2.1 times their net asset value. This valuation is supported by the high profitability of the group’s assets. But these profits could fall during an economic downturn.

Despite this risk, I think the scale and financial quality of this business makes it one of the best income buys in the financial sector. The stock now trades on 10 times forward earnings, with a prospective dividend yield of 5.9%. I’d be happy to keep buying at this level.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

After it crashed 25%, should I buy this former stock market darling in my Stocks and Shares ISA?

Harvey Jones has a big hole in his Stocks and Shares ISA that he is keen to fill. Should he…

Read more »

happy senior couple using a laptop in their living room to look at their financial budgets
Investing Articles

How’s the dividend forecast looking for Legal & General shares in 2025 and beyond?

As a shareholder, I like to keep track of the potential dividend returns I could make from my Legal &…

Read more »

artificial intelligence investing algorithms
Investing Articles

Could buying this stock with a $7bn market cap be like investing in Nvidia in 2010?

Where might the next Nvidia-type stock be lurking in today's market? Our writer takes a look at one candidate with…

Read more »

Investing Articles

Is GSK a bargain now the share price is near 1,333p?

Biopharma company GSK looks like a decent stock to consider for the long term, so is today's lower share price…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »