Better Dividend Stock: GlaxoSmithKline PLC or AstraZeneca PLC?

Source: Images Money via Flickr.

While dividends can be the cornerstone to any successful portfolio focused on the long term, not all dividends are created equally. Put plainly, some dividend checks aren't even worth the paper they're printed on, either because the dividend is extremely small, the payout is unsustainable, or the business model behind the company itself is in question.

This means making the decision to invest in dividend-paying stocks involves more than just comparing yields between companies. It means actually digging below the surface and analyzing factors such as growth, value, and sustainability when selecting a high-quality dividend stock.

Today we're going to do just that with two of the U.K.'s most enticing dividend stocks: GlaxoSmithKline (GSK 1.01%) and AstraZeneca (AZN 0.32%). By pitting these two against one another in the three key categories, we should be able to determine which one truly is the better dividend stock.

Growth
The first factor investors should consider when buying into a dividend stock is whether the company is growing. For a business to pay out consistent and growing dividends, it should theoretically be finding ways to improve its sales and boost profit.

That's a challenging outlook for both AstraZeneca and GlaxoSmithKline at the moment -- though they are by no means alone. The entire pharmaceutical sector is in the midst of a massive wave of patent exclusivity losses that is beginning to hit home for many investors.

Source: AstraZeneca.

AstraZeneca, for example, lost its exclusivity on blockbuster schizophrenia drug Seroquel in 2012. Since then, full-year sales dipped from $5.83 billion in 2011 to just $1.68 billion last year. Sales are on pace to fall by double-digits again in 2014.

GlaxoSmithKline is also staring down a similar fate, although its patent cliff doomsday has been delayed a few years. Glaxo's key drug is Seretide (known as Advair in the U.S.), a long-term asthma maintenance therapy that actually came off patent in 2011. Generic drug producers have been practically chomping at the bit to get in on this market, since Seretide/Advair is a $7 billion-plus per year drug, but prior to last year the Food and Drug Administration had not properly laid out the guidelines of what it would be looking for in a generic formulation. With that information finally laid out in September 2013, the sands of time on Glaxo's Seretide/Advair gravy train are ticking away.

Of course, each company also offers a unique niche of growth.

For AstraZeneca, this growth is expected to come from its diabetes franchise. In December, the company completed the $2.7 billion purchase (plus $1.4 billion in additional milestones that can be earned over time) of a prior joint venture with Bristol-Myers Squibb (BMY 1.38%). The purpose of the partner buyout was to get its hands on revolutionary SGLT2-based type 2 diabetes drugs Farxiga/Forxiga, Onglyza, and Bydureon. Considering the immense obesity epidemic in the U.S., and that many obese individuals have diabetes, this could be a genius move on AstraZeneca's part. 

Source: GlaxoSmithKline via Flickr.

GlaxoSmithKline's growth driver should continue to be its respiratory product line. Though Seretide/Advair will soon bow out of patent proection, the company's partnered LAMA/LABA long-acting COPD products Anoro Ellipta and Breo Ellipta, along with a number of other maintenance therapies, all have the opportunity to become blockbusters (i.e., achieve more than $1 billion in annual sales).

Honestly, this category is extremely close, but considering that Glaxo's top line is still expected to grow over the next five years while AstraZeneca's could be flat to down, I'm going to give a slight edge to GlaxoSmithKline.

Value
In addition to finding a dividend stock with growth potential, it's important for investors to find solid value, too. Normally within the healthcare sector, comparing valuation metrics is impossible if not downright silly since sales forecasts comprise the bulk of companies' market valuations. In the case of AstraZeneca and GlaxoSmithKline, though, we're looking at two established pharmaceutical companies, thus a side-by-side valuation comparison might lend some interesting insights.

Here are some of the key metrics you should know about AstraZeneca and GlaxoSmithKline:

Source: Yahoo! Finance. TTM = trailing 12 months.

While we had a fairly close contest in the growth category, GlaxoSmithKline is a runaway winner on valuation metrics. With the exception of a significantly larger debt load, which could be burdensome if the company needs to roll over any of its debt in future years and lending rates rise considerably, GlaxoSmithKline looks markedly less expensive than AstraZeneca on all other counts. Glaxo's growth rate over the next five years is projected to be markedly higher than AstraZeneca's (thus the wide PEG ratio difference), its profit margin over the trailing-12-month period is superior, and Glaxo's forward P/E is also more enticing to investors.

Sustainability
Finally, it's up to an income investor to establish whether a business model offers sustainability. For example, it was great watching Vertex Pharmaceuticals' Incivek reach $1 billion in total hepatitis C sales in less than three full quarters, but just a few years later the drug isn't even being sold anymore because there are more efficient treatments now on the market. The real question here is whether these pharmaceutical companies' business models and cash flow have staying power.

GSK Dividends Paid (TTM) data by YCharts.

Both companies have done a very good job of returning cash to shareholders in the form of a dividend. The implication here would be that both are making more than enough in cash flow to sustain these payouts thanks to a wide array of product and pipeline diversification. Of course, looking out a few years it would appear that Glaxo's EPS has a much better chance of moving higher than AstraZeneca's (again, primarily due to the introduction of new therapies and exclusivity losses), which would suggest that its business model is probably the healthiest of the two.

The better dividend stock is...
After comparing the U.K.'s pharmaceutical juggernauts, GlaxoSmithKline is the runaway better dividend stock. Although Glaxo is facing patent problems with Seretide/Advair, its COPD franchise looks strong, as does its remaining pipeline. With its reasonable valuation and a trailing dividend yield of 5.5%, few companies in healthcare might be more attractive to dividend-seeking investors than GlaxoSmithKline.