On the other, Astra is suffering from falling sales and is trying hard to reinvigoration its drug development pipeline, in order toreturn to growth.
Nevertheless, for many investors, Astra is the company of choice thanks to its attractive dividend yield of 3.9%. However, Shires potential for growth is not to be underestimated.
Shire has traditionally been dependent upontreatments for attention deficit hyperactivity disorder but the company is now becoming increasingly focused on rare disease treatment. A small but lucrative market.
Its Shires presence within this market, as well as the companys history of growth that ledmanagement to claim that the group can double annual sales to $10bn by 2020.Of course, Shire is now in a better position to chase this growth than is has ever been before, after receiving $1.6bn merger break fee from AbbVie.
Even without this cash infusion it would appears as if Shire is well on its way to hitting this revenue target. Third quarter revenues rose almost a third to $1.6bn, beating estimates and hitting a record for the company. Excluding exceptional items, earnings per share rose to $2.10, or 129p for the nine months to 30 September, up 93% year on year.
City analysts currently expect the company to report earnings per share of 205p for full-year 2014, which puts the company on a forward P/E of 19.9.
Unfortunately, Shire does not offer much in the way of a dividend, so income seekers may be disappointed. The companys shares support a dividend yield of 0.3% at present. Shires dividend payout is currently covered 13 times by earnings per share, leaving plenty of room for payout growth. Theres easily enough room for the company to hike its payout to 100p per share in the near future, a yield of 2.5% at present levels.
Far to go
As Shires growth explodes, Astra is struggling. The groups sales and profits are expected to contract next year, with growth returning during 2016. Management believes that2017 revenues will be broadly in line with 2013 revenues.
That being said, it remains to be seen if Astra can really generate this type of growth. Theres still plenty of work to do before the companys experimental cancer treatments can be brought to market. And Astra is racing against the clock to develop its treatments, as many of the groups peers are developing treatments with similar qualities.
However, as Astras sales and earnings contract over the next two years, the companys dividend, which is currently one of Astras most attractive qualities, will come under pressure.
Specifically, next year the companys payout will only be covered 1.6times by earnings per share. The year after the payout cover will fall to 1.4 times. If growth does not materialise then Astra could find itself paying out more than it can afford.
The bottom line
The best investors always look to the future, not the past.So, with this in mind Shire looks to be a better investment than Astra.
Shire has all the foundations in place to drive growth over the next few years. The treatment of rare diseases is a highly specialist and profitable business, as a result the company should be able to dominate the market.
Still, every portfolio needs a selection of shares with defensive qualities like those of Shireand Astra. A selection of defensive shares with attractive dividend yields gives your portfolio a solid backbone, allowing you to sleep soundly at night.
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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.