GlaxoSmithKline (GSK 1.64%) and Eli Lilly (LLY +0.80%) are enormous and profitable capstones of the pharmaceutical industry, responsible for discovering and commercializing dozens of new drugs each year. Both companies are backed by enormous drug development pipelines, some of the most capable leadership teams in the industry, and decades of highly successful competition within their markets.
For bargain-hunting investors, there's a lot to consider when it comes to which stock will make a better addition to their portfolios, especially considering how differently the two stocks have performed recently.
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GlaxoSmithKline's powerful pipeline may not be enough to drive growth
GlaxoSmithKline is a notoriously well-run company, reporting a solid 15.3% in profit margin and admirable year-over-year quarterly revenue growth of 18.7%. Much of this revenue growth stemmed from its impressive first-quarter consumer healthcare sales, which grew by 11% compared to last year.
With nine pipeline programs awaiting registration over the next year, GlaxoSmithKline's revenues are very likely to increase, adding to its trailing 12-month gross profits of $23 billion. Given the company's 37 different drugs and 15 different vaccines currently under development, it's likely that revenue growth will continue.
Nonetheless, GlaxoSmithKline's stock has recently underperformed the market, shrinking by 3% over the past five years. And, while its trailing annual dividend yield of 2.55% -- and a projected 4.5% forward annual dividend yield -- may excite investors, in the past five years the company's dividend growth has ebbed by more than 100%, to the chagrin of shareholders.
Eli Lilly aims to please shareholders with rising dividends and share buybacks
Like GSK, Eli Lilly is a favorite among pharma investors thanks to its capable leadership, extensive product development pipeline, and history of shareholder-friendly actions. The stock has grown by 90% in the past five years, outperforming the market, thanks in part to its strong profit margin of 24% and its decent year-over-year quarterly revenue growth of 15%. The company attributes its stunning first-quarter sales volume increase of 22% to pandemic-induced shifts in consumer buying habits, noting that its best-selling drugs were responsible for 19% of revenue growth so far this year.
In the next few years, Eli Lilly's revenues will continue to increase as the company moves some or all of its seven different products currently in regulatory review to the market for sale.
With a market cap more than $50 billion larger than GlaxoSmithKline's, Eli Lilly recently pleased its shareholders by completing around $500 million in share buybacks. And while Eli Lilly's trailing annual dividend yield is less than GlaxoSmithKline's at 1.62%, the former's dividend has grown steadily since 2018, whereas the latter's has ebbed. This means that investors should not overweight the importance of GlaxoSmithKline's larger dividend yield when considering which stock to buy, as it may be the case that returns from Eli Lilly's dividends eventually eclipse Glaxo's.
LLY Dividend Growth data by YCharts
Which stock is the better pick?
Compared with the pharmaceutical industry's average trailing 12-month price-to-earnings (P/E) ratio of 58.2, Eli Lilly's P/E ratio is 27.6, meaning that the stock may be a better bargain than GlaxoSmithKline, which has a P/E ratio of 42.2. This also suggests that both stocks are somewhat inexpensive for their earnings, thereby placing some upward pressure on their price.
As a result of its faster growth, more rapidly expanding dividend, higher profit margins, and more favorable price-to-earnings ratio, I think that Eli Lilly is the better pharma stock for discerning investors. While there isn't much to dislike about GlaxoSmithKline's stock, it simply hasn't pulled through for its shareholders in the same way that Eli Lilly's has.
