For most investors, a balance of growth, income and good value is the main aim when seeking out stocks to add to their portfolios. Certainly, some investors may favour one of those factors over the others, but it could reasonably be argued that the best long term risk/reward opportunities present themselves when a company has at least a degree of each of those attributes. That’s because it indicates that it is a company which is performing well and could offer share price gains.
The question, then, is which of these pharma stocks has the best mix of the three attributes: AstraZeneca (LSE: AZN) (NYSE: AZN), Shire (LSE: SHP) (NASDAQ: SHPG.US) or Hikma (LSE: HIK)?
Income/Growth Potential
Clearly, not all stocks pay generous dividends. This can be because it is more logical for them to reinvest in the business due to a relatively high growth rate, or because they are experiencing a challenging period. This is not the case, though, for AstraZeneca. Even though it is in the midst of a patent cliff, it continues to pay out around two-thirds of profit as a dividend, which seems to strike a sensible balance between reinvestment for future growth and also rewarding shareholders. As a result, AstraZeneca currently yields a very appealing 4.2%, which is well ahead of the FTSE 100’s yield of 3.5%.
Meanwhile, Shire and Hikma pay out just 7% and 19% of profit as a dividend respectively, which gives them yields of only 0.3% and 0.9%, but indicates that they may offer higher growth rates than AstraZeneca. Certainly, that is set to be the case in 2016, when Shire is forecast to increase its bottom line by 17% and Hikma by 18%. However, 2015 is due to be a tough year for both companies, with their bottom lines set to decline by 33% and 5% respectively.
As such, neither Shire nor Hikma appears to be a particularly strong growth play over the short to medium term, although as with AstraZeneca their medium to long term outlooks are very positive. In the case of AstraZeneca, it expects to resume growth in 2017, as its strategy of multiple acquisitions begins to have a real impact on its bottom line. Meanwhile, Shire is aiming to double sales by 2020, with Hikma having considerable long term growth potential in its key Middle East and North Africa region.
Valuations
While AstraZeneca currently trades on a price to earnings (P/E) ratio of 15.9, Shire and Hikma trade on significantly higher ratings. In fact, Shire has a P/E ratio of 21.1, while Hikma’s P/E ratio is slightly higher at 21.2. Therefore, there appears to be significantly more scope for an upward rerating in AstraZeneca’s shares, rather than in those of Shire or Hikma.
Certainly, the latter two companies have significant long term potential and may deliver better growth numbers than AstraZeneca over the next handful of years. However, with AstraZeneca now transitioning away from its patent cliff, offering a yield of 4.2%, and a much lower valuation than Hikma or Shire, it appears to be the best buy of the three companies at the present time.