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GlaxoSmithKline plc vs Shire PLC: Which Wins On Income And Growth?

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Shire (LSE: SHP) (NASDAQ: SHPG.US) are similar companies but with very different outlooks.

On one hand, Glaxo is struggling to grow but is returning huge amounts of cash to investors.

On the other hand, Shire is growing rapidly, although the company’s minuscule dividend payout leaves a lot to be desired.

So, which company should you choose for income and growth?

Bigger is not better
GlaxoSmithKline

Shire has become the shining star of the UK’s biotechnology sector during the past five years. Indeed, since 2008 Shire’s earnings per share have nearly doubled and are expected to grow a further 26% this year.

The company has been able to achieve this growth by focusing on specialist treatments, such as VYVANSE, a treatment for the maintenance of ADHD in adults. This narrowed focus has ensured that Shire has continued to prosper, while the majority of the company’s larger peers report falling sales and profits, as they lose exclusive manufacturing rights for a number of key ‘blockbuster’ treatments. 

What’s more, Shire is currently investing for future growth through targeted acquisitions. The company recently acquired Lumena Pharmaceuticals, a biopharmaceutical company with late-stage compounds for rare gastrointestinal and hepatic conditions, once again reinforcing Shire’s dominance within the niche pharmaceutical sector. 

But while Shire has been growing rapidly during the past five years, Glaxo has struggled. Indeed, despite being one of the largest pharmaceutical companies in the world, Glaxo’s earnings per share have actually fallen 7% since 2009, as patent expirations have taken their toll on sales.

That being said, Glaxo has a healthy pipeline of new treatments under development and the company’s R&D boffins have brought 15 new treatments to market during the past year or so.

However, Glaxo’s sales are not expected to return to growth until 2015.

Still, Glaxo’s management remains proactive and recently signed a deal with Swiss pharmaceutical giant Novartis, which will see the consumer divisions of the two biotechnology giants merge, creating a ‘world-leading’ consumer healthcare business with £6.5bn in revenue in 2013.

Additionally, Novartis is acquiring Glaxo’s oncology portfolio for $14.5bn and Glaxo is using $5.25bn of this cash to acquire Novartis’ vaccines business.

Valuation and income

Shire’s growth during the past few years has been impressive and investors have been willing to pay a premium for this growth. In particular, Shire currently trades at a historic P/E of 22, compared to Glaxo’s ratio of 15, making Shire look expensive. 

Nevertheless, with Shire’s earnings expected to jump 26% this year, the company trades at a forward P/E of 17.3 and a PEG ratio of 0.7, indicating that the company’s shares offer growth at a reasonable price.

For income seekers Glaxo is the better choice, as the company currently supports a 4.9% dividend yield. Shire on the other hand, only offers a token 0.4% dividend yield. 

Moreover, as part of Glaxo’s asset-swap deal with Novartis, the company is planning to return around £4bn to investors. Just to put that into some perspective, Shire’s net profit for 2013 was only £400m around 10% of the amount Glaxo is planning to return to shareholders.

Foolish summary

All in all, choosing between Glaxo and Shire is difficult. However, after taking into account the fact that Glaxo is expected to return to growth next year and company currently offers an attractive 4.9% dividend yield, I have to say that Glaxo appears to be the better choice for income and growth. 

Long-term outlook

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Rupert does not own any share mentioned within this article. The Motley Fool has recommended shares in Shire and GlaxoSmithKline.