My guess is many investors would value having a pharmaceutical stock as part diversified portfolio.
AstraZeneca (LSE: AZN) and GSK (LSE: GSK) are two obvious contenders. But which is best for a long-term holding period?
The businesses have different characteristics. Therefore, choosing one over the other may depend on an investor’s strategy.
Decent dividend income
Those focused on dividend income might opt for GSK. With the share price near 1,506p, the forward-looking yield is around 4% for 2024.
But we’ve yet to see how the business settles down after the recent separation from its consumer healthcare business (now Haleon). GSK is now more driven by research & development (R&D) than it was. And the dividend record shows the changes in the enterprise with recent declines in the shareholder payment.
It’s only in 2024 that City analysts expect the dividend to rise again by a modest single-digit percentage. And for a dividend-led investment, I’d prefer to see a record of steady dividend growth. But GSK has still to prove its dividend credentials going forward.
Meanwhile, AstraZeneca’s dividend record is steady with modest rises most years. However, with the share price near 11,063p, the yield is quite low. Looking ahead, investors can expect around 2.36% for 2024.
Strong growth in earnings
But AstraZeneca’s R&D pipeline has been delivering the goods for some time. And the company keeps developing new medicines that have been selling well. Forecasts for earnings growth are impressive – around 90% this year and about 16% in 2024.
Investors focused on growth might opt for shares in AstraZeneca.
Meanwhile, City analysts expect an improvement of around 30% in earnings at GSK this year and around 4% in 2024. It’s still progress, but it’s way behind the AstraZeneca performance.
And the growth situation helps to explain the valuation differences. The forward-looking earnings multiple for AstraZeneca is around 16 for 2024. But GSK’s is just below 10.
By traditional valuation measures, GSK looks cheaper than AstraZeneca. However, valuation often reflects growth prospects, and I think it does with these two companies.
Nevertheless, GSK may find its growth mojo in the coming years. Back in Jul, chief executive Emma Walmsley reported “another excellent quarter of performance, with strong sales and earnings growth, notably in HIV and Vaccines.” And there was “continued strengthening of the R&D pipeline and product portfolio.”
If the company can build momentum in its R&D pipeline, a value purchase of the stock today could end up being clever.
R&D is key for both companies
Several years ago, AstraZeneca looked similar to GSK now. But the company went on to deliver strong growth for its shareholders as can be seen in the chart:
However, positive outcomes are not certain for either company. And perhaps the biggest risk for investors in both cases is the ongoing performance of the R&D pipelines.
For example, a series of failures and a drying up of commercially successful product launches could sink either of the companies’ share prices and dividend streams.
Nevertheless, I think both businesses look attractive and I would consider them for a diversified portfolio of long-term stock holdings. As to which is best, I’m tempted by GSK. But I’d be happy owning either stock.
