If I was only allowed to invest in the shares of one company to fund my retirement, it would have to be a good one. Let’s make the challenge even harder and say that I can only invest in one firm and will not be allowed to sell the shares again, or even to look at the share price for another 25 years.
My five requirements
That would certainly qualify as a long-term, buy-and-hold approach to investing, so I’d want to be as sure as I could be about several things:
- The company is unlikely to go bust and leave me with a total wipeout.
- The underlying business is defensive rather than cyclical, and the cash will likely keep flowing into the company’s coffers over the holding period.
- Regular dividend payments will be available to plough back into my investment.
- The business has potential to grow and produce increasing profits and cash flows over time.
- The current valuation is fair.
With those five conditions satisfied, I’d be reasonably confident that capital appreciation from a rising share price would work alongside the re-invested dividends to compound my initial invested sum of money over the 25-year holding period.
My choice is pharmaceutical giant AstraZeneca (LSE: AZN). The company carries a fair bit of debt, but I think that’s alright because it operates in a defensive sector, which means that its incoming cash flow tends to be steady and predictable. People rarely forgo their medicines even when economic times are tough, and money is tight. It takes strong cashflow to pay interest payments on borrowings, and to pay out reliable dividends, so AstraZeneca’s financial record is reassuring.
Returning to growth
Over the past five years, cashflow has supported earnings well, and the firm has held its dividend broadly flat. That’s quite an achievement given that earnings have been under pressure because of the well-reported challenges faced by the company. The main problem has been that some of the firm’s best-selling products have timed out of patent protection, opening up the market to a flood of cheaper, generic, copycat drugs.
However, AstraZeneca seems to be getting its mojo back. City analysts following the firm expect earnings to grow this year, and during 2019. The company isn’t just sitting back and surrendering to competition. Instead, it’s working hard on its research and development pipeline to produce new drugs that could go on to become tomorrow’s bestsellers.
In July’s half-year results statement, chief executive Pascal Soriot told us that AstraZeneca is “firmly on track” to return to product sales growth in 2018. He added that new medicines developed by the firm are performing “strongly” and have established themselves as “major drivers of product sales.”
The outlook for the medium-to-long term is positive, and I’m as sure as I can be that AstraZeneca is capable of delivering material investment gains over my notional 25-year holding period. Luckily, the current valuation seems fair with a forward price-to-earnings ratio running close to 20 for 2019, and a forward dividend yield of 3.8%. There can be only one and, for me, it’s AstraZeneca.