If you’re an AstraZeneca (LSE: AZN) (NYSE: AZN.US) shareholder and would like to boost your 2014/15 dividend income by up to 170%, then I have a suggestion: sell your AstraZeneca shares today, and use the money to buy shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).
Let me explain
If you purchased £10,000 of AstraZeneca shares at their pre-Pfizer price of around 3,800p, then you could have expected around £442 of dividend income in 2014, equating to a prospective yield of about 4.4%.
Thanks to Pfizer’s interest, that same Astra stock has risen by 23%, and is now worth around £12,150. If you invested this in Glaxo stock at the time of writing, you could buy 740 shares, which would pay you an expected total dividend of £590 in 2014, based on current consensus forecasts.
In addition to this, Glaxo is planning to return £4bn to shareholders in the first half of 2015 — an amount that equates to 82p per share, or a further £605.
In other words, by selling Astra and buying Glaxo today, you can lock in a prospective income of £1,195 over the next 12 months, compared to just £442 from Astra — a 170% gain.
Too good to be true?
Of course, this plan isn’t perfect. Investors who paid much less than 3,800p for their Astra shares will see a smaller gain, as the yield on cost of their Astra shares will be higher.
Pfizer might pull together a higher bid for AstraZeneca — £50 per share is a number that’s talked about in the City — but it’s likely that this would be paid in a mixture of cash and Pfizer shares. Exchange rate differences and costs might mean that the final value to UK investors isn’t much higher than the current £46 share price.
It’s also important to emphasise that Pfizer hasn’t yet made a formal offer — a deal may not be agreed, and Astra’s share price could fall back to where it was a couple of weeks ago. If you’d be happy to continue holding Astra shares in this scenario, then don’t sell. However, if you’re hoping for a takeover and plan to reinvest the money elsewhere, I’d sell today.
Another reason to sell
If you bought AstraZeneca as a value investment, rather than an income buy, selling today also makes sense.
Astra shares now look pretty pricey, with a P/E of 18 and a prospective yield of just 3.6%, whereas Glaxo still looks good value, with a forecast P/E of 15, and a prospective yield of 4.9%.Â