Finding a company that has the perfect blend of both growth and income is a difficult game to play. However, it looks as ifShire(LSE: SHP) could be the perfect pick.
Up until now,my pharmaceutical sector favourite has beenGlaxoSmithKline(LSE: GSK), due to the companys impressive dividend yield and market leading position in the consumer healthcare market.
Unfortunately, Glaxo is struggling to grow and thats why Im looking to reduce my holding and build a position in Shire.
Glaxo is a great company. It has all the traits you need in a long-term pick: a defensive product offering, well-covered dividend and leading position in many markets.
Nevertheless, revenues for legacy drugs are declining as the group loses exclusive manufacturing rights. While the company does have a pipeline of 40 new treatments under development, its going to take years for these new products to have an effect on the bottom line.
Indeed, City analysts expect Glaxos earnings to fall marginallythis year before returning to steady, mid-single-digit growth during 2016. This kind of growth is nothing to get excited about.
On the other hand, Shire has an ambitious six-year plan for growth. Specifically, whenAbbVies deal to acquire Shire fell through last year, management stated that the group wasaiming to double annual sales to $10bn by 2020. And using this figure, its possible to work out the price Shires shares will be changing hands for by then.
For example, over the past five years Shires net profit margin has averaged 20%, although City analysts expect the groups net margin to hit 35% over the next three years. If Shires revenue has increased to $10bn by 2020, a net margin of around 35% means that the group will report a net profit of $3.5bn, around 2.3bn for the full-year 2020.
On a per share basis, this net profit figure translates into earnings per share of 3.90, based on the current number of shares in issue.
Then theres Shires valuation to consider. Indeed, over the past decade the company has traded at an average P/E of 20. So, using this multiple and factoring in Shires projected EPS figure for 2020, its reasonable to assume that the groups shares will be worth 78 each within five years. Thats a gain of 64% from present levels.
However, unlike Glaxo, which offers an impressive dividend yield of 5.4%, at present levels, Shires current dividend yield of 0.3% is nothing to get excited about. But once again, if you look to the future, Shires dividend has huge growth potential.
Currently, Shires dividend payout is covered around 13 times by earnings per share, and the group is retaining the majority of its earnings.
In comparison, the rest of Shires peers return the majority of their income to shareholders. Shires peers have an average dividend cover of 1.2 times, indicating that, on average, Shires peers are returning 80% of earnings to shareholders via dividends.
Over the long-term, its likely Shire will initiate a similar dividend policy. So, working back once again, if Shire pays out 80% of 2020s projected earnings of 3.90 per share, the company is set to offer a dividend of around 3.12 per share during 2020, a yield of 6.6% based on current prices.
All in all, then not only does Shire offer the potential for rapid growth but theres also scope for the company to become an income investment over the long-term.
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