Can GlaxoSmithKline Outperform Pfizer?
If you're interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren't always as easy as they sound, so in this series, I'm going to compare some of the best-known names from the FTSE 100 (UKX), FTSE 250 and the US stock market.
I'm going to use three key criteria -- value, income and growth -- to compare companies to their sector peers. I've included some US shares, as these provide UK investors with access to some of the world's largest and most successful companies. Although there are some tax implications to holding US shares in a UK dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.
Today, I'm going to take a look at pharmaceutical heavyweights GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) and Pfizer (LSE: PFZ) (NYSE: PFE.US). All data is sourced from Morningstar, Reuters and company reports.
1. Value
The easiest way to lose money on shares is to pay too much for them -- so which share looks better value, GlaxoSmithKline, or Pfizer?
Value | GlaxoSmithKline | Pfizer |
|---|---|---|
Current price-to-earnings ratio (P/E) | 13.8 | 21.4 |
Forecast P/E | 11.8 | 12.2 |
Price-to-book ratio (P/B) | 10.7 | 2.4 |
Price-to-sales ratio (P/S) | 2.5 | 3.3 |
These valuation statistics suggest that Glaxo is more attractively valued than Pfizer. Using the forward P/E as a measure for both companies -- which should be pretty accurate, based on 2012 earnings forecasts -- Glaxo looks cheaper than Pfizer, although not by a huge margin.
However, the companies' P/S ratios are more interesting, especially when you also look at the two companies' operating margins. Not only does Glaxo's lower P/S mean that Glaxo investors get more revenue per pound than Pfizer investors, but Glaxo's higher profit margins -- Glaxo's five-year average operating margin is 8% higher than Pfizer's -- mean that if you buy Glaxo shares, each pound you spend will equate to more of Glaxo's profits than it would with Pfizer. Assuming that these profits are underpinned by positive cash flow, this should mean that Glaxo can afford to maintain a higher dividend yield than Pfizer, at current share prices.
Of course, it's possible that the shares are priced like this because institutional investors believe that Glaxo's profits are not as sustainable or reliable as Pfizer's. However, I believe Pfizer's premium is more a reflection of US market conditions than of any fundamental difference between the two companies.
2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do GlaxoSmithKline and Pfizer compare in terms of income?
Value | GlaxoSmithKline | Pfizer |
|---|---|---|
Current dividend yield | 5.3% | 3.6% |
5-year average historical yield | 4.6% | 4.8% |
5-year dividend average growth rate | 7.8% | -3.6% |
2013 forecast yield | 5.8% | 3.5% |
GlaxoSmithKline is a clear winner in the income stakes, not least because Pfizer's dividend is still recovering from a hefty 37.5% cut in 2008, whereas Glaxo managed to continue to grow its dividend throughout the financial crisis.
Glaxo's current yield is also substantially higher than Pfizer's, as is its 5.8% forecast yield for 2013. It's worth noting, however, that yields on US shares are generally lower than those on UK shares at the moment, and Pfizer's 3.5% forward yield is relatively high for the US market.
3. Growth
Even if your main interest is value or income investing, you do need to consider growth. At the very least, a company needs to deliver growth in line with inflation -- and realistically, most successful companies need to grow ahead of inflation if they are to protect their market share and profit margins.
How do GlaxoSmithKline and Pfizer shape up in terms of growth?
Value | GlaxoSmithKline | Pfizer |
|---|---|---|
5-year earnings per share growth rate | 1.8% | -6.1% |
5-year revenue growth rate | 3.4% | 6.9% |
5-year share price return | 0.0% | 11.3% |
It's clear that neither GlaxoSmithKline nor Pfizer is a growth company, and in this case I'm going to call it a draw between the two companies.
Pfizer has delivered stronger revenue growth over the last five years, and its share price has also performed better. However, despite spending billions of dollars on share buybacks, its earnings per share (EPS) have fallen over the last five years, whereas Glaxo has managed to maintain minimal EPS growth.
Should you buy GlaxoSmithKline or Pfizer?
For my money, it's a clear-cut decision on all counts -- although I should point out that I do own shares in GlaxoSmithKline.
GlaxoSmithKline's income credentials are strong, and unlike Pfizer, it didn't have to slash its dividend during the financial crisis. Today, Glaxo offers a very attractive 5.3% yield, outclassing Pfizer's 3.6%. Although both companies have struggled to grow earnings over the last five years, Glaxo has managed better, which should help underpin its dividend, too.
Glaxo is also the winner on valuation, in my opinion. This firm's combination of a lower price-to-sales ratio and higher operating margins appeals to me as it means that each pound invested in Glaxo shares entitles me to more profit than it would with Pfizer.
Finally, while both companies have failed to generate meaningful growth over the last five years, it's worth nothing that both appear to have dealt with the worst of the patent cliff and will be introducing new patent-protected drugs over the next few years. These should generate strong earning streams that will help drive EPS growth and, hopefully, support further dividend growth. Big cap companies like Glaxo and Pfizer may be slow movers, but they have a breadth and depth that helps them survive and grow in the long term, even in adverse economic conditions.
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