The pharmaceutical sector has been one of the best performing sectors in the last few years. A global M&A surge has rippled through the sector, especially in the USA, and has sent stock prices surging. For long-term investors it’s a highly attractive sector, especially as a defensive play. Even if the world enters another recession, people will still need medicine and drugs. Do these three companies offer a safe haven for cash and will the shares post further gains?
Shire
Shire (LSE: SHP) has outperformed the market by a vast amount in the last few years but recently the shares have fallen away from highs. I think this has presented a decent buying opportunity. Shares were off on Monday as the company announced its $32bn acquisition of US listed Baxalta. Shire has stated that the combination will create over $500m a year in synergies and the combined entity will be the largest rare disease-focused company in the world. There is however a potential sticking point, the US government would lose another tax-paying company and may decide to play tough with Shire by blocking the deal. Even so, the company trades on a reasonable PE of 10, which illustrates how undervalued the company is. I think Shire is a good bet for long-term investors and any dip now presents a buying opportunity.
AstraZeneca
I’ve long been a fan of AstraZeneca (LSE: AZN) and see the shares returning to highs of above 4,800p very soon. The company trades on a slightly higher PE of 15.1 and carries a dividend yield of over 4.5%, which is easily covered by cash. Surprisingly enough, much of the growth is coming from AstraZeneca’s Chinese business, which has helped earnings per share rise by over 11% in 2015. This earnings per share rise should continue into 2016 and beyond as the exciting drugs and medicines in the pipeline gain approval and hit the market. The company also has the financial firepower to acquire smaller companies that have good potential drugs. This will allow the business to keep the pipeline full and make investors more comfortable investing for the longer term.
GlaxoSmithKline
Income-seeking investors should take a serious look at GlaxoSmithKline (LSE: GSK). Dividend yield is now up to 6% and it’s also covered well by cash. The company has been under pressure due to blockbuster drugs coming off patents and thus the cash flow gap needs to be filled. However, the company saw this coming from a long way off and has made some smart acquisitions and internal developments. This will lead to around a 10% rise in earnings per share for 2016, which should help the shares to surge.
These healthcare companies above may not be the most exciting stocks in London but that doesn’t dent the defensive qualities they hold. 2016 looks like it may be a very testing year with continued turmoil in commodities, Chinese economic problems and general global growth issues. Investing cash into defensive healthcare may be the smartest investment of the year.
