Which Big Pharma Stock Is The Better Buy: AstraZeneca plc Or GlaxoSmithKline plc?

Should you buy AstraZeneca plc (LON: AZN) or GlaxoSmithKline plc (LON: GSK)?

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Over the last year, the question of which Pharma major you should have bought has a relatively straightforward answer. That’s because AstraZeneca (LSE: AZN) (NYSE: AZN.US) has seen its share price rise by a very impressive 23%, while GlaxoSmithKline’s (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?

Valuation

When it comes to their valuations, GlaxoSmithKline has considerably more appeal than AstraZeneca. That’s 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 AstraZeneca’s P/E ratio of 18. This means that there is arguably greater scope for an upward rerating to GlaxoSmithKline’s share price than there is to AstraZeneca’s and, in addition, GlaxoSmithKline’s 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.

Income Prospects

Although both companies are planning to deliver no growth in dividends over the next year, they remain steadfast income plays. That’s 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. That’s because it has a dividend yield of 5.5%, while AstraZeneca’s yield is much lower at 3.8%. Certainly, both yields are relatively appealing, but GlaxoSmithKline’s 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.

Looking Ahead

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.

That’s 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.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Peter Stephens owns shares of AstraZeneca and 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.

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