With CSL Limited (ASX: CSL) shares currently nudging $94 it looks like they might beat Commonwealth Bank of Australia (ASX: CBA) to the psychologically impressive mark of $100. At these hefty prices some shareholders could rightly be wondering if the stock has moved into overvalued territory.
It's a fair question considering that according to consensus data provided by Morningstar, CSL is trading on a forecast price-to-earnings (PE) ratio for the current financial year (FY) of 24.4x and a FY 2016 PE of 22.7x.
That's undoubtedly a premium to the market's PE ratio for FY 2016 for the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) which stands at 17.9x, especially when one considers that the forecast growth rates of CSL and the index are 8.2% and 9% respectively in FY 2016.
Despite the premium pricing of CSL's stock, there are multiple reasons to stick with your CSL shares. These include –
- The board acts in the interests of shareholders and has undertaken numerous share buybacks. Currently there is a $950 million buyback underway.
- The board also sees that excess funds are returned to shareholders through dividends. The recent interim dividend (in Australian dollar terms) rose 25% on the prior corresponding period to 74 cents per share.
- Thanks to the recently proposed US$275 million acquisition of Novartis' influenza vaccine business, CSL is set to become the second-largest company in the global influenza vaccine industry, with manufacturing plants in the USA, UK and Australia.
CSL sits amongst a handful of outstanding ASX-listed global healthcare stocks, which include ResMed Inc. (CHESS) (ASX: RMD) and Ramsay Health Care Limited (ASX: RHC). The durability of these businesses, coupled with their growth profiles makes each of them deserving of a premium to the market, however, as the entire market continues to move higher and possibly above the 6,000 mark in the near term, investors would be wise to be vigilant to the prospect of overvaluation.
