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Neil Woodford Still Believes in AstraZeneca plc And GlaxoSmithKline plc. Should you?

When star dividend investor Neil Woodford announced the top 10 holdings in his new fund CF Woodford Equity Income last year, two old favourites stood right at the top of the list.

Woodford has been a long-term admirer of pharmaceutical giants AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK), and they made up 8% and 7.1% of his new fund, respectively. As many noted at the time, few fund managers would put such a high weighting on any individual stock.

Big Boys

Today, they remain the fund’s second and third largest holdings respectively, behind British American Tobacco (another of Woodford’s long-term favourites). They make up a slightly smaller proportion of the fund, at 7.11% and 6.03% respectively.

CF Woodford Equity Income is up 13.5% in the past 12 months, against a 10% drop on the FTSE 100, but the great man’s success isn’t down to the pharmaceuticals.

AZN has fallen 9% over the past year and GSK is down nearly 14%. So far, the big pharmaceuticals haven’t rewarded his faith in them. That won’t worry Woodford, who likes to play the long game. But should you share his unswerving faith in these two stocks?

Safe Or Sickly?

AstraZeneca’s recent decline looks far from terminal. Fortune has temporarily swung against it, as loss of exclusivity on leading blockbuster drugs and competition from generics hits revenues, but chief executive Pascal Soriot’s heavy investment in the firm’s drugs pipeline should ultimately pay off.

Woodford is admired for his patience and investors may also have to take it slow, with forecast earnings per share (EPS) growth flat this year and expected to fall by 4% in 2016. Revenues should start swelling from 2017, however, as the company makes progress on its five key growth platforms: Brilinta (heart treatment), diabetes, respiratory, emerging markets and Japan. 

Woodford isn’t alone in his admiration for AstraZeneca. Deutsche Bank recently upgraded it to ‘buy’ from ‘hold’ and raised its price target to 5,700p from 4,850p. Now, you pay 4,225p. Today’s yield 4.3% should grease your wheels while you wait for this stock to accelerate, but trading at 15 times earnings you aren’t buying at a discount. Woodford is right to be patient, but he might have to bide his time longer than he suspects.

Inhale That

I have been less impressed by GlaxoSmithKline, which appears to have lost its way since the embarrassing and costly Chinese bribery scandal. Its share price is lower than it was five years ago, so this certainly isn’t one of Woodford’s winners. Disappointing recent trials of its Breo Ellipta inhaler so just how hit and miss this business can be, no matter how big you are.

Again, investors are banking on improved pipeline activity, with recent blockages expected to ease from next year. Glaxo may continue to underperform in the short term, with a forecast 21% drop in EPS this year, but that is expected to rebound to 15% in 2016.

Today’s discounted entry price of 13 times earnings and super-sized 6.28% yield looks like a tempting entry point. Although if pipelines and profits disappoint, today’s sky-high dividend may not survive 2017. I can see why Woodford retains his faith in AstraZeneca and GlaxoSmithKline, but it may be sorely tested over the months to come.

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Harvey Jones 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.