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Why GlaxoSmithKline plc And Shire plc Are Dividend And Growth Buys

GlaxoSmithKline (LSE: GSK) and Shire (LSE: SHP) would be my pick of the pharmaceutical companies to invest in at the moment. While GSK is a dividend investment, Shire is a growth play. Let’s look at each company in turn.

GlaxoSmithKline

Glaxo is one of the world’s largest pharmaceutical companies, with strengths in asthma, cancer, diabetes and digestive diseases. It has been a firm renowned as having one of the strongest drugs pipelines in the pharma industry.

Yet in the last few years it has not quite lived up to expectations. Last year the company was damaged in one of its fastest growing markets by the bribery scandal in China. Sales of several blockbuster drugs have fallen as their patents have expired, while newly launched drugs, although selling well, have not matched the big sellers of yesteryear.

Yet this remains one of the most innovative healthcare businesses in the world. I think what GlaxoSmithKline and the rest of the pharmaceutical industry is learning, just like the TV industry learnt before it, and supermarket retail is learning now, is how to adapt to the world of the long tail.

You see, in the past many drugs were so popular they sold more than the rest of the market put together. You can think of Zantac and Losec as the Jewel in the Crown and Upstairs Downstairs of pharma. These drugs sold in their millions, and made drugs companies billions.

But today if you want to buy a drug because you are suffering from a bit of heartburn, alongside Zantac and Losec you have Nexium, Dexilant, Reglan and perhaps a dozen other branded drugs. The days when one drug grabbed the bulk of the market are gone.

That’s why I think that traditional pharmaceutical companies such as GSK are unlikely to grow quickly. But they are still highly profitable, and generate prodigious amounts of cash. That’s why they are the ideal dividend shares. Glaxo is currently on a 2015 P/E ratio of 16.4 with a dividend yield of 5.2%. That’s a high yield, which is well covered by profits. I view this as a strong dividend buy.

Shire

One of the tragedies of the past was that if you suffered from a rare disease, the likelihood was that there would be no treatment. These days, things are different. Shire is a business built upon the idea that you produce targeted treatments to a wide variety of diseases by use of the latest science and biotechnology.

Shire, instead of being a pharmaceutical titan, is really a network of smaller companies, each designed to tackle a particular ailment. You see, myriad rare diseases now have myriad treatments. And the world of the long tail is about a lot more than spaghetti sauce or TV programmes.

Who would have thought that such an apparently disparate business would be so successful and so profitable? The earnings per share progression shows how quickly this company is growing:

2011: 97p

2012: 86p

2013: 148p

2014: 229p

2015: 245p

A 2014 P/E ratio of 22.0, falling to 20.6 in 2015 sounds expensive, but I think this is a clear growth buy.

I see GlaxoSmithKline as a worthy addition to your high-yield portfolio. We at the Fool think that dividend shares should be a cornerstone of your investing approach, and we have written an easy-to-read, practical guide all about this key technique.

Want to learn more? Just click on this link to read "The Fool's guide to dividend investing" and it will be dispatched instantly to your inbox, completely free.

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