Let’s not kid ourselves — interest rates are going nowhere (slowly). Every time central bankers try to raise them their nerves fail, and with good reason. The West can’t take its own shock medicine. Emerging markets certainly can’t. Japan has refused it for years.
Even if the Federal Reserve does take the plunge the shockwaves may deter it from repeating the experiment for a long time. Sorry, savers, but you continue to face a forlorn future.
I’m not that sorry, because there are ways to get a better return on your money, if you are willing to take on a bit more risk. Savings rates may remain sickly but pharmaceutical stocks AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) are the perfect cure.
Pills & thrills
The two FTSE 100 stalwarts have been serving up regular dollops of dividends for years and they have rarely been more nourishing than today, with Astra currently yielding a healthy 4.27% and Glaxo a positively rosy 6.17%, more than 12 times the current base rate.
Investing in companies is riskier than sticking money in the bank, of course. There is no guarantee that either Astra or Glaxo will sustain its dividend in the longer run. To be able to do so they need to produce a steady pipeline of exciting and profitable new drug treatments, to replace those lost to expiring patents and generic competition.
Astra accelerates
AstraZeneca has seen a number of profitable patents expire in recent years. Next in line are Crestor and Nexium, which accounted for a third of all group sales in Q3 last year. Yet chief executive Pascal Soriot is excited about the company’s drugs pipeline, which includes new generation treatments that harness the immune system to fight cancer cells. He predicts these new blockbuster treatments will lift revenues from today’s $26bn to $45 by 2023, but remember, that’s just a prediction. Plenty could go wrong in the next eight years.
AstraZeneca’s prospects look good enough for Deutsche Bank to upgrade it to a ‘buy’ with a target price of 5700p, which is 36% higher than today’s 4180p. That could take time, with Astra trading at a fully valued 15 times earnings and earnings per share (EPS) forecast to dip slightly this year and next. While you wait, the yield — nicely covered 1.5 times — is yours to keep.
Glaxo has been so-so
Glaxo has formed the core of many a portfolio but recent performance has been disappointing, with the share price no higher than it was five years ago. Management is still trying to shake off the after-effects of the Chinese bribery scandal, while falling sales have hit earnings.
Again, management is pinning its type on its drugs pipeline, identifying new pharmaceutical and vaccine products that could deliver at least £6bn of revenues a year by 2020. EPS is forecast to fall a hefty 21% this year but should then rise by 12% in 2016. Glaxo is struggling more than Astra right now, but it may have better turnaround potential. It is also cheaper at just over 13 times earnings.
One word of warning: Glaxo’s dividend cover is threadbare at just 1.2 times, so if profits don’t improve that could ultimately come under threat. But given the dismal rewards from playing safe with cash, the risks of investing AstraZeneca and GlaxoSmithKline may be well worth taking.
