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Better Buy: GlaxoSmithKline vs. Merck

By David Jagielski - Oct 15, 2019 at 9:00AM

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Which pharmaceutical stock could provide investors with the best possible return?

Healthcare is big business, and investors looking for stable, long-term growth stocks should look no further than Merck & Co. (MRK -0.46%) and GlaxoSmithKline (GSK -3.00%). Both are significant players in the pharmaceutical industry, and both companies offer investors some great investment options with low volatility that pay dividends.

Let's take a closer look to see which of these is the better option today.

Merck gives investors both value and growth

Despite showing some impressive growth in its most recent quarter, Merck's share price has risen just 10% in 2019. It has been carried in part by the strong success of Keytruda, a cancer-fighting drug that could be integral to the company's long-term success. With Keytruda improving the survival rate of patients suffering from lung cancer, there's a lot of potential to help Merck generate even more success in the years to come, especially as it receives approval to use Keytruda for more treatment options. Most recently, the U.S. Food and Drug Administration gave it the OK for treating certain types of melanoma.

From a growth perspective, Merck has a lot of appeal. But what makes it an even better buy is that unlike smaller pharma stocks that may have a long way to go to become good investments, Merck is already there. With revenues north of $42 billion last year and profits of more than $6 billion, the company is already producing some very strong results. And with free cash flow of more than $8 billion, the company is in a great position to take on growth initiatives, even including potential acquisitions.

Shelves filled with various pharmaceutical products.

IMAGE SOURCE: GETTY IMAGES.

Its dividend of 2.6% is another added bonus for investors. The only negative is that the stock is a bit expensive today, trading at around 24 times earnings and eight times its book value.

GlaxoSmithKline has some great growth opportunities as well

GlaxoSmithKline (GSK) has had near mirror results to Merck this year, and there hasn't been a lot separating the two stocks. Like Merck, the company also has an exciting product in Shingrix, which has been very effective in preventing shingles. That could help drive a lot of growth, especially amid an aging U.S. demographic that could see demand for the product rise in the future. Shingrix was recently approved for use in China as well. In addition, the company also has Zejula, a drug showing good progress in treating ovarian cancers, that could also be key to long-term growth.

While GSK is smaller than Merck, the company has also produced some strong results over the years. Sales of $30.8 billion in 2018 have grown by 29% in three years, from $23.9 billion in 2015. It has also generated a strong operating income of more than $6 billion in each of the past four years and looks on pace to continue to do that again this year.

A look at valuation shows us that GSK is the more expensive of the two stocks, trading at more than 40 times earnings and a whopping 17 times book value. GSK, does, however, pay a higher yield, with its dividend up around 4.4%.

A stock chart comparing GSK and Merck

Image Source: YCharts

Why Merck wins it for me

Although it pays a higher dividend, GSK is simply too expensive to buy today, and Merck's stronger, more consistent financials help make it a safer all-around investment. However, both stocks could achieve a lot of growth over the years, and investors who buy GSK could be very happy with their results as well.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Merck & Co., Inc. Stock Quote
Merck & Co., Inc.
MRK
$90.60 (-0.46%) $0.42
GSK Stock Quote
GSK
GSK
$34.95 (-3.00%) $-1.08

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