Among leading UK pharma shares, both GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN) have been in the spotlight recently. Glaxo has been attracting attention for its plans to split into two parts, with its pharma business and consumer goods operation going separate ways. AstraZeneca’s visibility has been heightened by its vaccine. Both share prices have been moving up, but more slowly than the FTSE 100 index. The GlaxoSmithKline share price has added 9% over the past year, while AstraZeneca is up 12%, at the time of writing this article earlier today.
I’ve been investigating both of these FTSE 100 shares as potential additions to my portfolio. Here’s what I think.
AstraZeneca has never been a very consistent performer when it comes to earnings. That reflects its pharma focus, where new drugs can sell very well but profits can fall away as patents expire. Currently it has a promising pipeline of drugs, which I think could help support growth in both revenues and profits in years to come. But pharma development costs are high for uncertain reward – that could weigh on future revenues and profits at AstraZeneca, as well as its rivals.
The growth outlook for Glaxo is less clear. Indeed one of the reasons some investors have agitated for change at the company is that they have been underwhelmed by its performance. On one hand, both revenues and profits have grown in recent years and that could continue. On the other, future sources of strong growth are not that obvious to me. However, splitting the company into two could help provide sharper focus in both the pharma and consumer goods businesses. So that could in itself act as a spur to growth.
AstraZeneca offers a 2.2% dividend yield, and has not raised its dividend for years. At face value, Glaxo’s yield of 5.1% looks a lot more attractive. It also has not raised its dividend for years, though. Added to that, the company has guided investors to expect a lower total dividend once the company splits.
Even with the dividend cut, I reckon buying GlaxoSmithKline today could offer better dividend earnings potential to my portfolio than investing in AstraZeneca.
The GlaxoSmithKline share price valuation compared to AstraZeneca
AstraZeneca is trading on a price-to-earnings ratio of 52. In sharp contrast, Glaxo’s P/E ratio is just 13. In other words, the GlaxoSmithKline share price looks four times as cheap on this metric as AstraZeneca.
I don’t think that tells the full story, though. AstraZeneca earnings are forecast to grow sharply due to new products, which could make its prospective valuation more attractive. So the gap between the two valuations might not be quite as dramatic as it first looks.
Nonetheless, the GlaxoSmithKline share price looks a lot cheaper right now than its rival. It has a more attractive dividend yield, and I think that could be the case even if reduced after the split. While AstraZeneca’s pipeline is exciting, Glaxo has a solid enough portfolio of products and brands that I think it can also do well in future. Both companies face risks of unsuccessful drug development hurting profits. But when thinking about to what I could buy for my portfolio, I currently consider the GlaxoSmithKline share price to offer me better value than AstraZeneca.
Christopher Ruane has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.