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Better Buy: GlaxoSmithKline, AbbVie, or Merck?

By Peter Stephens – Mar 19, 2014 at 9:30AM

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Shares in GlaxoSmithKline have underperformed the index in recent years. Does this mean the stock is undervalued?

Since the current bull market began in March 2009, shares in GlaxoSmithKline (GSK -2.38%) have underperformed the S&P 500 by a significant amount. While the wider index has posted gains of over 140%, GlaxoSmithKline has managed just over 90%. Could the past underperformance of GlaxoSmithKline now mean that, relative to the market and to its peers, the stock represents good value?

Strong news flow
GlaxoSmithKline's drug pipeline continues to show strength, with the latest piece of news being positive. Its injectable drug, mepolizumab passed its phase 3 trial, with the drug showing statistically significant results for severe eosinophilic asthma. Meanwhile, a second Phase 3 study consisting of an injection of mepolizumab below the skin every four weeks also met its primary endpoint of reducing daily oral corticosteroid use, while maintaining asthma control. In addition, GlaxoSmithKline has also recently received marketing authorization recommendations from the European Medicine Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP) for its chronic obstructive pulmonary disease drugs Anoro and Incruse. 

Dividend comparison
As mentioned, shares in GlaxoSmithKline have underperformed the S&P 500 over the last five years. However, evidence of their potential attraction at current levels can be seen in the dividend yield, which stands at 2.4%. This is significantly higher than that of the S&P 500, which has a yield of 1.9%
GlaxoSmithKline's yield also compares favorably to that of sector peer Merck (MRK 0.55%). It has also underperformed the S&P 500 over the last five years, up 135% versus 154% for the S&P 500. It offers a dividend yield of 2.3%, which is ahead of the S&P 500's yield but behind the 2.4% offered by GlaxoSmithKline. Sector peer AbbVie (ABBV 1.75%), however, has a higher yield of 3.1%.

Merck and AbbVie have both had significant news in the last couple of months. Merck's recent news flow has been upbeat, with the most significant piece being developments regarding its progress on the PD-1 drug, MK-3475. Merck intends to increase its own work on the drug, with the company announcing early stage studies for 20 different PD-L1-positive solid tumor types that have not yet been explored. Merck also announced plans to team-up with three major biopharma companies (Incyte, Pfizer and Amgen) in January, with the group proceeding with efforts to combine MK-3475 with other drugs in clinical trials. The results of the trials (and other developments surrounding MK-3475) could be a major catalyst on the share price.

News flow at AbbVie also has been encouraging, with the company reporting last week that its hepatitis C combination treatment cured almost 100% of patients in a Phase 3 trial. It is one of six late-stage studies that Abbvie conducted as part of an FDA application, with the company set to make the submission by the end of June 2014. The outcome could prove to be a major catalyst for Abbvie's share price because sales projections for the drug were not included in its most recent quarterly update.

Looking ahead
While GlaxoSmithKline has lagged the S&P 500 over the last five years, I like the company for its dividend yield. However, despite being ahead of the yields offered by both the S&P 500 and Merck, it lags that of AbbVie. While all three stocks could have bright futures ahead of them, AbbVie looks to be the most attractive at current price levels based on a considerably higher dividend yield. It could be all set for a great 2014.

Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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