So, what is the future of pharma? With the patents of so many blockbuster drugs expiring, are pharmaceutical companies destined to decline? Although big pharma is a mature industry, the recent discovery of a potential stem cell cure for diabetes is an example of the type of discovery that still lies ahead of us. That’s why I think the drug companies are worthwhile dividend investments.
But which is the better dividend investment, GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) or AstraZeneca (LSE: AZN) (NYSE: AZN.US)?
GlaxoSmithKline
GSK has recently been tarnished by the bribery scandal in China, and its share price has been sliding recently, as profits have fallen behind expectations.
Yet this is still one of the most innovative healthcare companies in the world, with one of the strongest drug pipelines in the industry. This means that earnings are likely to recover over the next few years.
Yet this company is reasonably priced, as the fundamentals show. The 2014 P/E ratio is 14.7, with a dividend yield of 5.8%, and the 2015 P/E ratio is 12.8, with a dividend yield of 6.0%.
So this is a company that is growing earnings, and also has a high and rising dividend yield. And the recent fall in the share price has created a buying opportunity.
AstraZeneca
AstraZeneca was, for a long time, the most unloved of the pharma companies, because of the recent patent expiry of so many of its drugs. But now, post-patent cliff, with profitability recovering, its share price has rebounded strongly.
However, the rise in the share price means that the firm is not as cheap as it was. The 2014 P/E ratio is 16.5, with a dividend yield of 3.9%, and the 2015 P/E ratio is 16.7, with a dividend yield of 4.0%.
The share price has pushed higher because of Pfizer‘s recent takeover bid for this company. I can’t say whether this acquisition will take place or not, but what the speculation has done is make AstraZeneca comparatively expensive.
Foolish bottom line
These companies are worthwhile additions to your high-yield portfolio. That’s why Neil Woodford has recently bought into both businesses. However, the recent fall in GlaxoSmithKline’s share price, concomitant with the rise in AstraZeneca’s share price, means that AZ is now really a bet on a takeover which may or may not happen, whereas GSK has a strong likelihood of growing earnings organically over the next few years.
Thus of these two firms, my view is that GlaxoSmithKline is now the better dividend investment.
