Pharmaceutical companies make great investments due to their defensive nature and reliable dividend payouts. The FTSE 100s two pharma giants,AstraZeneca(LSE:AZN) (NYSE: AZN.US) andGlaxoSmithKline(LSE: GSK) (NYSE: GSK.US) are no different. But if you could only choose one, which would be the best pick for your portfolio?
Astra has one thing on its mind at the moment and thats growth. After fending off a bid from US pharma giant Pfizer, the company laid out an ambitious growth plan to deliver annual revenues of$45bn by 2023, up from reported revenues of just under $26bn during 2013.
Since issuing this ambitious growth plan, Astras management has admitted that it will be a tough target to hit, but the company has plenty going for it.
For example, Astra has developed an industry-leading immuno-oncology portfolio with 13 clinical trials already under way. A further 16 trials are planned and a total of 14 potential new drugs are already in the process of Phase III testing or registration before sale. As many as ten drug approvals are set for 2016.
Right now Astra offers a dividend yield of 3.8%, which is similar to the market average of 3.5%. The companys dividend is nothing to get excited about.
Still, Astras dividend is guaranteed for the next few years as managements compensation is linked to key dividend metrics. In particular, thecompanysAzip executive compensationplan dictates that the companysdividend must not be cut and earnings per share must not fall below 1.5 times the dividend.If either of these targets are not met, then management pay benefits are forfeited.
Compared to Astra, Glaxo does not have a defined growth plan in place but that does not mean that the group is taking things easy. Indeed, Glaxos management has signed a flurry of deals over the past few months, which have repositioned the company and put it on a course for steady growth.
These deals include the asset swap with Novartis and adeal with Aspen Pharmacare Holdings,Africas biggest generic drug maker. Additionally, Glaxo is planning to spin off itsHIV business set up with Pfizer five years ago, whichcould attract a valuation of up to 15bn. A selection ofprescription medicine brands in Europe and the U.S. with annual sales of around 1bn is also being auctioned off. And finally, the group is planning tocut 1bn of costs over the next three years.
All these deals should reshape Glaxo, infuse the group with cash and put it on a growth footing. Whats more, the company has around 40 new treatments under development at present. These new treatments should only add to the companys growth.
Of course, Glaxos most attractive quality is its dividend yield. At present levels, the company supports a dividend yield of 5.3%. The payout is covered one-and-a-half times by earnings per share and management has made a commitment to maintaining the payout at current levels. So, for income seekers, Glaxo is a better pick than Astra.
All in all, it seems as if the best company for growth investors is Astra, while income seekers should look to Glaxo. That being said, it remains to be seen if Astra can actually achieve its target to double revenues over the next few years. A lot rests on this commitment by management.
Still, whatever your preference, be it growth or income, your portfolio should always contain a selection of dependabledividend paying stocks. However, dependable dividends are not easy to find, there are plenty of companies out there that have cut their payouts at a moment’s notice.
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Rupert Hargreaves owns shares of GlaxoSmithKline. 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.