Why I’d Sell AstraZeneca plc And Buy Shire PLC

shireShire (LSE: SHP) and AstraZeneca (LSE: AZN) are two very different companies. On one hand, Shire is growing rapidly and has plenty of new drugs under development, which should drive sales growth.

On the other, Astra is suffering from falling sales and is trying hard to reinvigoration its drug development pipeline, in order to return to growth. 

Nevertheless, for many investors, Astra is the company of choice thanks to its attractive dividend yield of 3.9%. However, Shire’s potential for growth is not to be underestimated.

Niche market 

Shire has traditionally been dependent upon treatments for attention deficit hyperactivity disorder but the company is now becoming increasingly focused on rare disease treatment. A small but lucrative market. 

It’s Shire’s presence within this market, as well as the company’s history of growth that led management to claim that the group can double annual sales to $10bn by 2020. Of course, Shire is now in a better position to chase this growth than is has ever been before, after receiving $1.6bn merger break fee from AbbVie.

Even without this cash infusion it would appears as if Shire is well on its way to hitting this revenue target. Third quarter revenues rose almost a third to $1.6bn, beating estimates and hitting a record for the company. Excluding exceptional items, earnings per share rose to $2.10, or 129p for the nine months to 30 September, up 93% year on year.

City analysts currently expect the company to report earnings per share of 205p for full-year 2014, which puts the company on a forward P/E of 19.9.

Unfortunately, Shire does not offer much in the way of a dividend, so income seekers may be disappointed. The company’s shares support a dividend yield of 0.3% at present. Shire’s dividend payout is currently covered 13 times by earnings per share, leaving plenty of room for payout growth. There’s easily enough room for the company to hike its payout to 100p per share in the near future, a yield of 2.5% at present levels.

Far to go

As Shire’s growth explodes, Astra is struggling. The group’s sales and profits are expected to contract next year, with growth returning during 2016. Management believes that 2017 revenues will be broadly in line with 2013 revenues.

That being said, it remains to be seen if Astra can really generate this type of growth. There’s still plenty of work to do before the company’s experimental cancer treatments can be brought to market. And Astra is racing against the clock to develop its treatments, as many of the group’s peers are developing treatments with similar qualities. 

However, as Astra’s sales and earnings contract over the next two years, the company’s dividend, which is currently one of Astra’s most attractive qualities, will come under pressure.

Specifically, next year the company’s payout will only be covered 1.6 times by earnings per share. The year after the payout cover will fall to 1.4 times. If growth does not materialise then Astra could find itself paying out more than it can afford.

The bottom line

The best investors always look to the future, not the past. So, with this in mind Shire looks to be a better investment than Astra.

Shire has all the foundations in place to drive growth over the next few years. The treatment of rare diseases is a highly specialist and profitable business, as a result the company should be able to dominate the market. 

Still, every portfolio needs a selection of shares with defensive qualities like those of Shire and Astra. A selection of defensive shares with attractive dividend yields gives your portfolio a solid backbone, allowing you to sleep soundly at night.

With that in mind, I'm considering investing in several of the five FTSE shares highlighted within this exclusive wealth report.

All five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends, and have just been declared by the Fool as "5 Shares You Can Retire On"!

Just click here for the report -- it's free!

Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.