The FTSE 100 may have fallen more than 12% in 2018 but not every sector took a pasting. Healthcare swung back into favour as nervy investors started to see the charm in traditional defensive stocks once more.
In rude health
This is quite a shift, as defensives have been out of favour for years now, with investors piling into growth heroes such as US tech giants to take advantage of the longest bull market run in history. Now that run may be coming to an end, and priorities are changing.
FTSE 100 pharma giants AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) both had excellent years, share price wise, rising 17.5% and 13.83%, respectively. Given the carnage elsewhere, that’s more than solid. In fact, it’s a triumph.
With the two stocks currently yielding 3.49% and 5.42%, the total investor return has been even higher. It’s always good to see old friends swing back into favour.
As my Foolish colleague Rupert Hargreaves has pointed out, AstraZeneca has come a long way since management rejected a £69.4bn bid from US drugs giant Pfizer in 2014. Over five years it’s up 63%, an increase that looks even more impressive when you compare it to the 1.5% drop across the FTSE 100 as a whole.
Also, Astra was supposed to be a case of jam tomorrow, as we waited for CEO Pascal Soriot to re-stock its all-important drugs pipeline, to offset the anticipated drop in blockbusters such as blood pressure drug Crestor. Instead, we have jam today. Targets now include delivering Brilinta/Brilique’s potential as a cardiovascular medicine, building its diabetes and respiratory portfolios, delivering six new cancer medicines by 2020, and accelerating growth in emerging markets and Japan.
After years of negligible or negative earnings growth, City analysts are predicting a 10% increase in 2019. The downside of Astra’s recent successes is that the stock is no longer cheap, trading at a forecast valuation of 21.1 times earnings. It still looks a great long-term buy and hold, though. Especially amid current volatility.
Glaxo’s share price has been far bumpier, actually trading 7% lower than five years ago. It enjoyed a major boost just before Christmas, though, after announcing it has reached an agreement with Pfizer to combine their consumer health businesses into a new ‘world-leading’ joint venture that will have combined sales of nearly £10bn.
The group has also been on the acquisition trail, agreeing to buy US-based oncology-focused pharmaceutical group Tesaro Inc for around £4bn. Like Astra, it also has to rebuild its drug pipeline as blockbusters such as lung drug Advair come off patent although, happily, no generic rival to that US money-spinner has popped up yet.
Glaxo offers a more generous yield than Astra and management recently confirmed it plans to pay dividends of 80p per share both this year and next. Earnings are forecast to fall 1% this year, which is disappointing, but the valuation is more attractive than Astra’s. Trading at a forecast 13.1 times earnings, Glaxo looks the ideal buy for these uncertain times.
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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.