Which Is The Better Pick For Your Portfolio: GlaxoSmithKline plc Or AstraZeneca plc?

GlaxoSmithKline (LSE: GSK) and AstraZeneca (LSE: AZN) are similar businesses, but if you could only pick one then choosing between the two is difficult.

It really comes down to your personal investment goals — are you looking for income or growth?

Income pick

Glaxo is the income play of the two pharma giants.  The company’s shares currently support a dividend yield of 5.5%, and management has made a commitment to maintaining the payout at its present level until 2017. 

Unfortunately, Glaxo’s management has also stated that the dividend payout won’t grow over the next three years, which is disappointing. Still, there’s scope for serious payout growth after 2017. 

Room for growth

The next three years will be a transitional period for Glaxo. The company expects 2015 core earnings per share to decline at a percentage rate “in the high teens” as sales of key drugs continue to fall.

However, new treatments will start to work their way through the company’s treatment pipeline by 2016. These new products, combined with Glaxo’s drive to cut costs by £3bn per annum by 2017, will lead to slow and steady earnings growth. 

Glaxo’s management believes that group’s revenue will grow at a low-to-mid single digit percentage per annum from 2016 to 2020. During the same period, core earnings per share are expected to expand at a rate in the mid-to-high single digits. 

City analysts believe that Glaxo’s earnings per share will fall by 11% this year before rebounding by 7% during 2016.

According to my figures, assuming a 7% per annum growth rate through to 2020, Glaxo is on track to earn 111p per share for full-year 2020. This indicates that Glaxo is trading at a 2020 P/E of 13.2. 

Exciting prospects 

Astra, on the other hand, is expecting to grow at a much faster rate than Glaxo over the next five years. 

Astra currently has 72 new cancer treatments under development, 31 of which are immuno-oncology drugs. 13 immuno-oncology drug trials are under way, with a further 16 planned at the end of November last year.

And it’s this wave of new treatments that has given Astra’s management the confidence to state that revenues will hit $45bn by 2023. 

According to my figures, which are based on Astra’s historic profit margins, on revenue of $45bn the company could report a net profit of $9bn, around £5.6bn. This translates into earnings per share of £4.43.

So, based on these figures, Astra is currently trading at a 2023 P/E of 10. 

Extra income 

Astra is set to grow rapidly over the next decade, but the company also supports a dividend yield of 4% at present. The payout is covered 1.5 times by earnings per share and isn’t expected to grow over the next few years. 

Still, a yield of 4% is above the market average of 3.4%. 

The bottom line

All in all, I’d argue that the choice is simple. If you’re looking for income, Glaxo is the better pick. However, if you’re looking for a growth play, Astra could be the best choice.

That being said, Astra does support a dividend yield of 4%, which is above the market average and complements the company’s long-term growth profile extremely well. If income investors are willing to accept a the reduced level of income, in exchange for growth potential, Astra could be the best bet. 

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Rupert Hargreaves owns shares of GlaxoSmithKline. 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.