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2 Deeply Discounted Dividend Stocks to Buy and Hold Right Now

By Anirudh Shankar - May 30, 2021 at 9:19AM

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These pharmaceutical companies might make great long-term additions to your portfolio.

Finding bargains can be a tough challenge even in a market that's going down. But there are always discounts to be had, and two great blue-chip companies -- AstraZeneca (AZN 1.01%) and GlaxoSmithKline (GSK -0.56%) -- are currently selling for bargain prices. Both offer solid dividends in the mix, meaning that a buy-and-hold strategy with these stocks in your portfolio could prove quite fruitful over the long run.

Here's why you may want to take a look at these two companies. 

Patient consulting with doctor.

Image source: Getty Images.

1. AstraZeneca

Still down from its all-time highs of $61 set back in July 2020, AstraZeneca is currently in a great spot to possibly break through that record and head higher. Trading at a forward price-to-earnings ratio of just 15.23, the stock looks cheap compared with a year ago, when it traded at its average market valuation with a forward P/E of 20 -- a level it's maintained for the past five years, indicating that today's valuation is a discount.

Its current discount can be attributed to a tremendous growth in earnings to which the stock price has yet to catch up, highlighting the immense potential AstraZeneca has to rise. Its 2018 earnings per share were $1.70, 2019's were $1.03, and 2020's were $2.44 -- a remarkable jump. 

AstraZeneca's new drugs are one reason for optimism about its growth. One in particular that shows incredible promise is Fasenra, for severe asthma. Fasenra's sales potential looks especially impressive given the market in which it operates. The global asthma market in 2020 came in at $20.6 billion, which could provide a lot of potential for Fasenra -- already a near-blockbuster, with nearly $1 billion in 2020 sales -- to grow and take market share away from GlaxoSmithKline's Nucala and Sanofi's Dupixient. Doctors already seem to prefer Fasenra thanks to its more precise dosing, and Fasenra could end up bringing AstraZeneca several billion dollars annually. 

Eventually, AstraZeneca's stock price will catch up with its revenue growth. Taking analysts' EPS estimates of $3.77 for the year and figuring on a P/E of 21, we are looking at a $79 share price -- a 38% return on this discounted stock should it return to the valuation which the market has historically applied.

AstraZeneca also pays a dividend, yielding 2.44%, almost double the SPDR S&P 500 ETF's 1.3%. With a reliable dividend history going back to 1999 and potential for lots of upside, AstraZeneca is worth considering as a set-and-forget stock. 

2. GlaxoSmithKline

Founded in 1715 as a small apothecary shop, GlaxoSmithKline has spent more than 300 years growing into the multinational pharmaceutical company we know today. The business behind such brand names as Aquafresh, Nicorette, Sensodyne, and Tums, GlaxoSmithKline is familiar to consumers worldwide.  

The company today sits off recent highs of more than $45 a share set before March 2020. It currently trades at about $39, and looks inexpensive at that valuation, with a forward P/E of 13.98. Its five-year average forward P/E has been 14.59, so buying today could be getting the stock cheap. If it rises to back to its highs, investors would reap a 15% return; even if it only reverts to its normal market valuation, the return would be 9.5%. 

Management has discussed potentially cutting the dividend as the company spins off its consumer health segment in 2022. That division brought in 10 billion pounds in 2020, or almost 30% of total revenue (34 billion pounds). The company is making this move to help transform itself into a research and development-focused biopharma; the spun-off segment will focus on consumer health. Dividend investors value safe payouts, and a dividend cut makes sense for a business that's spinning off a segment that's been adding to revenue. Without a cut, the payout ratio after the spinoff would be very high, and the company might not be able to meet its obligations to pay shareholders, making the dividend unsustainable. 

Thus, this move should bring safety to the dividend and to the financial health of the company. GlaxoSmithKline can use that excess cash to reinvest into other parts of the business to drive future revenue growth. One such business is its vaccine segment; the company is currently co-developing a COVID-19 vaccine with pharmaceutical company Sanofi. So far, the partners have garnered a $2.1 billion contract with the U.S. gvernment to develop and deliver 100 million doses of their vaccine, and deals with the European Union and Canada to deliver 300 million and 60 million doses to those areas respectively.

While the financials of the latter two deals have yet to be been disclosed, the terms are likely similar to those reached with the U.S. Such deals have the potential to bring billions in revenue, not just in the near term but for the future as the world continues to fight against COVID-19. 

When looking for stocks to buy and hold, safety and stability must be taken into account. Still off its highs, GlaxoSmithKline has a lot more room to grow in share price, and given the dividend cut, its payout should be much more secure as part of a long-term strategy.

Anirudh Shankar has no position in any of the stocks mentioned. The Motley Fool recommends GlaxoSmithKline. The Motley Fool has a disclosure policy.

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Stocks Mentioned

AstraZeneca PLC Stock Quote
AstraZeneca PLC
AZN
$67.17 (1.01%) $0.67
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$422.14 (-1.34%) $-5.75
Sanofi Stock Quote
Sanofi
SNY
$41.27 (0.19%) $0.08
GSK Stock Quote
GSK
GSK
$34.06 (-0.56%) $0.19

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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