Health and medical supply shortages are front on mind this week as the coronavirus pandemic continues. The lockdown is impacting us all and when it will end is in the lap of the gods.
Creating a vaccine or finding a virus-beating drug looks like the only way to stop the contagion and get back to normality. This puts the spotlight on pharmaceutical companies and the part they have to play in helping humanity.
Investing in FTSE 100 healthcare stocks
If I had £1k to spend, I’d be looking to invest it in the following three FTSE 100 healthcare stocks.
The UK’s biggest pharma giant, AstraZeneca (LSE: AZN), is a £90bn company with a forward dividend yield of 3%. In its recent full-year results, it said cash generation improved and it reduced net debt by 8%. It missed its earnings target, but it’s developing new therapies and increasing its range of drugs.
Sector peer GlaxoSmithKline is a £75bn company, with a 6% dividend yield and EPS of 92p. Because of the market crash, the GSK share price has fallen 18% year-to-date. Yet, I think it looks a good investment, especially as it’s partnered Clover Biopharmaceuticals, a Chinese biotech company, to work on a vaccine for Covid-19. I think GSK is a good addition to any long-term portfolio.
Hikma Pharmaceuticals is a £4bn company focused on developing generic drugs. Its dividend yield is 2.5% and core operating profit increased 9% in its recent full-year results. Hikma is already developing drugs to combat seasonal allergic rhinitis and asthma. These are symptoms of Covid-19, and it’s confirmed an increase in demand for its products. It’s also prioritising the manufacture of medicines in this category, such as respiratory, pain, anti-virals and anti-infectives.
Price-to-earnings ratio confusion
Forecast price-to-earnings ratios (P/E) have been falling across all listed companies. But these P/E estimates might not be as cheap as they seem. When a single company goes out of favour, its P/E drops in response to a falling share price. This can be either a warning, or a bargain buy. However, when there’s a market correction and stocks fall across the board, the new lower P/E may not be the bargain it first seems. And some high P/Es can actually be good value.
AstraZeneca’s 12-month forecast P/E is 19.9, but its current P/E is 80, the discrepancy between the two doesn’t seem accurate. Market volatility is to blame, but this proves investors need to be careful when using P/E as a guide to a stock’s value.
Yes, this is a very expensive stock to buy, but that’s because it looks strong and resilient. It has a great product range including nine best-selling drugs with annual sales of over $1bn.
The share price has fallen 10% year-to-date, so if it’s a FTSE 100 company you want to own, then buying in a dip could be the best chance you’ll get.
The GSK P/E is 16 and its 12-month forecast P/E is nearly 13, while Hikma has a P/E of 11 and its forecast is 14. There’s not much discrepancy between these figures, so I think they’re likely to be accurate.
These companies are all favourites of UK equity income managers and it’s easy to understand why. Once this pandemic is under control, I think western governments will inject cash into diagnostic testing and general healthcare improvements. Big pharma businesses like these should thrive.
Kirsteen owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Hikma Pharmaceuticals. 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.