Why I'd buy Neil Woodford's favourite dividend stock AstraZeneca plc in 2018

It has been a mixed year for Neil Woodford's favourite stock AstraZeneca(LSE: AZN). Heading into the year, investors and analysts alike were skeptical about the pharmaceutical and biopharmaceutical company's prospects. But cautious buying sent the shares up to a high of 5,500p at the end of June -- ahead of the release of data from the company's lung cancer study of its immunotherapy Imfinzi.

Unfortunately when the data was published, it didn't live up to expectations and the shares slumped back down to 4,300p.

However, a robust set of third quarter figures, posted at the beginning of November, have helped investors regain confidence in Astra's outlook.

For the third quarter, the group posted core earnings per share of $1.12, ahead of the average City estimate of $1.09, while revenues were $6.2bn versus expectations of $6bn. What's more, Astra's CEO Pascal Soriot declared alongside these figures that earnings for the full-year would be "towards the favourable end" of the previously guided "low to mid teens percentage decline," which pleased investors and analysts.

Turnaround gaining traction

As stated, Astra is Neil Woodford's favourite dividend stock and the star fund manager has allocated around 8% of both his Woodford Equity Income and Income Focus funds to the pharmaceutical giant, making it the largest holding for both funds. Woodford is betting that Astra's treatment pipeline will yield results in the years ahead and the stock's 4%-plus dividend yield is here to stay.

And I believe that Woodford will be rewarded in 2018, a year that's set to be a transformational one for Astra. Indeed, even though City analysts are expecting the firm to report a mid-single-digit decline in earnings per share for the year, the firm's outlook should start to improve towards the end of 2018 as a string of new treatments take up the slack from declining Crestor sales.

To the beginning of November, the firm had received approvals for four new drugs and sales of existing products were growing faster than expected within emerging markets. There are still plenty of other new cancer-fighting drugs in the company's pipeline and as these are approved for sale, the group will slowly move towards its goal of doubling revenues by 2023.

Time to buy?

By the end of 2018, investors should have much more clarity on Astra's outlook and management should be able to establish if the company will return to growth in 2019. I believe it's highly likely that growth will return in 2019 based on the recent product approvals and a slower than expected decline in Crestor sales.

The one downside is that shares in Astra are relatively expensive. The stock currently trades at a forward P/E of around 17. In comparison, peer GlaxoSmithKline trades at a forward earnings multiple of just under 12. This valuation does not leave much room for error if the company fails to live up to expectations.

That said, I would argue that Astra deserves a high multiple due to its treatment pipeline, which has been labelled as one of the best in the sector by City analysts.

You can't lose with Astra

So overall, 2018 should be a transformational year for Astra and as momentum starts to build, the company could generate huge returns for investors. And even if growth doesn't materialise, shareholders will still receive a market-beating dividend yield.

Many investors don't realise that dividends have the potential to more than double your returns through the miracle of compounding, dramatically increasing your chances of being able to achieve financial independence.

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Rupert Hargreaves owns shares in GlaxoSmithKline. 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.

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