Lets notkid ourselves interest rates are going nowhere (slowly). Every timecentral bankers try to raise them their nerves fail, and withgood reason.The West cant take its ownshock medicine. Emerging markets certainly cant. Japan has refusedit for years.
Even if the Federal Reserve does take the plungethe shockwaves may deter itfrom repeating the experiment for a long time. Sorry, savers, but you continue to face a forlorn future.
Im not that sorry, because there are ways to get a better return on your money, if you are willing to take on a bit more risk. Savings rates may remain sickly but pharmaceutical stocksAstraZeneca (LSE: AZN)and GlaxoSmithKline (LSE: GSK)are the perfect cure.
Pills & thrills
The two FTSE 100stalwarts have been serving upregular dollops of dividends for years and they have rarely been more nourishing than today, with Astra currently yielding a healthy 4.27% and Glaxo a positivelyrosy6.17%, more than 12 times the current base rate.
Investing in companies is riskier than sticking money in the bank, of course. There is no guarantee that either Astra or Glaxo will sustain its dividend in the longer run. To be able to do so they need to produce a steady pipeline of exciting and profitable new drug treatments, to replace those lost to expiring patents and generic competition.
AstraZeneca has seen a number of profitable patents expire in recent years. Next in lineare Crestor and Nexium, which accounted for a third of all group sales in Q3 last year. Yet chief executivePascal Soriot is excited aboutthe companys drugs pipeline, which includesnew generation treatmentsthat harness the immune system to fight cancer cells. He predicts these new blockbuster treatments will lift revenues from todays $26bn to $45 by 2023, but remember, thats just a prediction. Plenty could go wrong in the next eight years.
AstraZenecas prospects look good enough for Deutsche Bank to upgrade it to a buy with atarget price of 5700p, which is 36% higher than todays 4180p. That could take time, with Astra trading ata fully valued 15 times earnings and earnings per share (EPS) forecast to dip slightly this year and next. While you wait, the yield nicely covered 1.5 times is yours to keep.
Glaxo has been so-so
Glaxo has formed the core of many a portfolio but recent performance has been disappointing, with the share price no higher than it was five years ago. Management is still trying to shake off the after-effects of the Chinese bribery scandal, while falling sales have hit earnings.
Again, management is pinning its type on its drugs pipeline, identifying new pharmaceutical and vaccine products that could deliver at least 6bn of revenues ayearby 2020. EPS isforecast to fall a hefty 21% this year but should then rise by 12% in 2016. Glaxo is struggling morethan Astra right now, but it may havebetter turnaround potential. It is also cheaper at just over 13 times earnings.
One word ofwarning: Glaxos dividend cover is threadbare at just 1.2 times, so if profits dont improve thatcould ultimately come under threat. But given the dismal rewards from playing safe with cash, the risks of investing AstraZeneca and GlaxoSmithKline may be well worth taking.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.