Over the last year, the question of which Pharma major you should have bought has a relatively straightforward answer. Thats because AstraZeneca (LSE: AZN) (NYSE: AZN.US) has seen its share price rise by a very impressive 23%, while GlaxoSmithKlines (LSE: GSK) (NYSE: GSK.US) value has fallen by 6% during the same time period.
However, the future matters much more than the past. Therefore, looking ahead, which one will prove to be the better performer?
When it comes to their valuations, GlaxoSmithKline has considerably more appeal than AstraZeneca. Thats because it trades on a much lower price to earnings (P/E) ratio and, furthermore, is not forecast to post a decline in earnings over the next two years, which its stable mate is.
For example, GlaxoSmithKline has a P/E ratio of 15.9, which is 12% lower than AstraZenecas P/E ratio of 18. This means that there is arguably greater scope for an upward rerating to GlaxoSmithKlines share price than there is to AstraZenecas and, in addition, GlaxoSmithKlines bottom line is forecast to rise by 5% in 2016, while that of AstraZeneca is expected to fall by 2% in the same year. This could cause investor sentiment in GlaxoSmithKline to warm relative to AstraZeneca and help to encourage a narrowing of the current valuation discount moving forward.
Although both companies are planning to deliver no growth in dividends over the next year, they remain steadfast income plays. Thats because they are relatively robust in terms of having revenue streams that are less cyclical and more defensive than those of the wider index.
However, GlaxoSmithKline again beats AstraZeneca on the income front. Thats because it has a dividend yield of 5.5%, while AstraZenecas yield is much lower at 3.8%. Certainly, both yields are relatively appealing, but GlaxoSmithKlines income return is a full 1.7% higher than that of AstraZeneca and, if your focus is income, it is likely to be the better option especially with earnings growth pencilled in for 2016.
Clearly, the market is still pricing in a bid for AstraZeneca following the interest from Pfizer last year. While this is still very possible, GlaxoSmithKline could also be subject to similar interest moving forward. After all, it offers better value than AstraZeneca and, with its ViiV Health Care subsidiary offering superb growth potential in a niche space, it could find itself being a bid target this year.
Thats not to say, of course, that either stock should be bought just because they may prove to be bid targets. Their current valuations, long term pipelines and income potential make them both stand out as stocks worth owning at the present time. However, if you can only choose one then GlaxoSmithKline, with its lower valuation, better near-term prospects and higher yield, seems to be the one to go for. After a period of disappointment, this could finally be its year.
Of course, finding the best stocks at the lowest prices is never an easy task. That’s why The Motley Fool has written a free and without obligation guide called 10 Steps For Making A Million In The Market.
It’s a step-by-step guide that could make a real difference to your portfolio returns. It could even help you retire early, pay off the mortgage, or build a seven-figure portfolio for yourself.
Click here to get your copy of the guide – it’s completely free and comes without any obligation.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.