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Why I’d pick the GSK and AstraZeneca share prices to beat my State Pension

After a lengthy process, I have managed to free up an old company pension and have it transferred to a SIPP. It was an old-style defined benefits scheme, and a good few hoops needed to be jumped through — but my pension provider made me what I considered a very good enhanced offer, and also paid for the independent advice I needed legally to make the move.

My big question now is what shares to invest in, and it’s going to be almost entirely FTSE 100 companies — I reckon they’re by far the best choices for beating the State Pension of approximately £8,500 per year.

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“Aren’t people worried about Brexit?” asked a friend the other day when we were chatting about share investment, and yes they clearly are. But the FTSE 100 is full of multinational companies whose businesses will barely notice the UK’s exit from the EU, however badly it goes.

Cracking recovery

A look at the AstraZeneca (LSE: AZN) share price, which has gained 15% over the past 12 months, tells me two things. One is that investors are finally warming to the company’s turnaround under the leadership of Pascal Soriot (which was always going to take a signficant number of years), and the other is that there’s been a so-called flight to quality as people abandon what they see as Brexit risk and buy shares they see as safer.

That does reinforce my feeling that the best long-term strategy is to always buy shares in safer high-quality companies paying good dividends, regardless of the political and economic environment. And I am bemused when folk apparently think that buying quality only matters when the most apt fruit-based analogy for the shape of the economy is that of the pear.

The recovery in AstraZeneca’s earnings per share is forecast to kick in strongly over the next two years, with double-digit growth on the cards for 2020 putting the shares on a PEG ratio of 0.7 — and that’s good for a small-cap growth company, never mind a FTSE 100 giant.

A 2020 P/E of 17 is not demanding in my view, and a very well covered forecast dividend yield of 3.7% is one that I expect to be set for a long spell of progressive rises.

Better value?

If you’d prefer a bigger dividend now, the City has GlaxoSmithKline (LSE: GSK) pegged at a yield of 5.3%. Glaxo shares are also trading on forward P/E multiples of around 12 to 13, though there isn’t the same earnings growth on the cards as we see at AstraZeneca. The shares still look cheap to me, but why?

At the end of 2018, Glaxo revealed that it plans to shed its consumer healthcare division and merge it with Pfizer, creating a business with annual sales close to £10bn and which will be split out into a new FTSE-listed company within three years.

It’s clearly a profitable business, and there will be some who think letting it go is a mistake. But ace investor Neil Woodford has been the vocal personification of those who think a break-up is better for years. After all, drug development is a very different business to retail healthcare, and AstraZeneca’s refocus on its core strength has done it a world of good.

I think the same will be true of GlaxoSmithKline, and it’s firmly on my list of pension candidates.

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Alan Oscroft 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.

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