Dividend Aristocrats In Focus: West Pharmaceutical Services

Valuation & Expected Returns

In the recent past, West Pharmaceutical Services has delivered highly attractive returns, as its shares rose by a massive 400%+ over the last five years. This was, at least partially, the result of a steep increase in its valuation. West Pharmaceutical Services currently trades for ~65 times this year’s expected earnings-per-share, based on current consensus estimates.

That is a quite high valuation, both in absolute terms, as well as relative to how the company was valued in the past. Up through 2014, West Pharmaceutical Services mostly traded at a high-teens earnings multiple, although the valuation range has expanded since then. Right now, shares are the most expensive they have ever been, which does not bode well for the company’s future returns.

We believe that shares would be fairly valued at 22 times EPS. As a result, we view the stock as severely overvalued, even when factoring in the forecasted earnings-per-share growth of 9% per year. With a very low dividend yield of just 0.2%, West Pharmaceutical Services is still expected to generate negative total returns over the coming five years, estimated at -11% a year.

This is a very weak projected total return figure and shows the potential danger in buying stocks with extremely elevated valuation multiples. Overall, we do not deem the stock attractive at current prices.

Final Thoughts

West Pharmaceutical Services is an attractive company on a fundamental basis. The business is recession-resilient, the company benefits from macro growth tailwinds, and the company’s near-term revenue and earnings growth outlook are compelling.

However, the stock’s valuation is very high, and we believe that shares are massively overvalued at current levels. We thus think that West Pharmaceutical Services is a company that is not suitable for investment at current valuation levels, even though we like many of the underlying properties of the company.

The very high share price also is the reason why West Pharmaceutical Services’ dividend yield is very low, at just 0.2%. Despite the fact that the company has recently become a Dividend Aristocrat, we do not deem it worthy for income investors at current prices.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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