Pharmaceutical companies make great investments due to their defensive nature and reliable dividend payouts. The FTSE 100’s two pharma giants, AstraZeneca (LSE:AZN) (NYSE: AZN.US) and GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) are no different. But if you could only choose one, which would be the best pick for your portfolio?
Growth seekers
Astra has one thing on its mind at the moment and that’s growth. After fending off a bid from US pharma giant Pfizer, the company laid out an ambitious growth plan to deliver annual revenues of $45bn by 2023, up from reported revenues of just under $26bn during 2013.
Since issuing this ambitious growth plan, Astra’s management has admitted that it will be a tough target to hit, but the company has plenty going for it.
For example, Astra has developed an industry-leading immuno-oncology portfolio with 13 clinical trials already under way. A further 16 trials are planned and a total of 14 potential new drugs are already in the process of Phase III testing or registration before sale. As many as ten drug approvals are set for 2016.
Right now Astra offers a dividend yield of 3.8%, which is similar to the market average of 3.5%. The company’s dividend is nothing to get excited about.
Still, Astra’s dividend is guaranteed for the next few years as management’s compensation is linked to key dividend metrics. In particular, the company’s ‘Azip’ executive compensation plan dictates that the company’s dividend must not be cut and earnings per share must not fall below 1.5 times the dividend. If either of these targets are not met, then management pay benefits are forfeited.
Dependable dividend
Compared to Astra, Glaxo does not have a defined growth plan in place but that does not mean that the group is taking things easy. Indeed, Glaxo’s management has signed a flurry of deals over the past few months, which have repositioned the company and put it on a course for steady growth.
These deals include the asset swap with Novartis and a deal with Aspen Pharmacare Holdings, Africa’s biggest generic drug maker. Additionally, Glaxo is planning to spin off its HIV business set up with Pfizer five years ago, which could attract a valuation of up to £15bn. A selection of prescription medicine brands in Europe and the U.S. with annual sales of around £1bn is also being auctioned off. And finally, the group is planning to cut £1bn of costs over the next three years.
All these deals should reshape Glaxo, infuse the group with cash and put it on a growth footing. What’s more, the company has around 40 new treatments under development at present. These new treatments should only add to the company’s growth.
Of course, Glaxo’s most attractive quality is its dividend yield. At present levels, the company supports a dividend yield of 5.3%. The payout is covered one-and-a-half times by earnings per share and management has made a commitment to maintaining the payout at current levels. So, for income seekers, Glaxo is a better pick than Astra.
Foolish summary
All in all, it seems as if the best company for growth investors is Astra, while income seekers should look to Glaxo. That being said, it remains to be seen if Astra can actually achieve its target to double revenues over the next few years. A lot rests on this commitment by management.
