Can AstraZeneca plc (ADR) (AZN) Outperform Merck & Co., Inc. (MRK)?

LONDON — If you’re interested in building a profitable, diversified portfolio, then you will often need to compare similar companies when choosing which share to buy next. These comparisons aren’t always as easy as they sound, so in this series, I’m going to compare some of the best-known names from the FTSE 100, FTSE 250, and the U.S. stock market.

I’m going to use three key criteria — value, income, and growth — to compare companies to their sector peers. I’ve included some U.S. shares, as these provide U.K. investors with access to some of the world’s largest and most successful companies. Although there are some tax implications to holding U.S. shares in a U.K. dealing account, they are pretty straightforward and I feel are outweighed by the investing potential of the American market.

AstraZeneca plc (ADR) (NYSE:AZN)

Today, I’m going to take a look at two big pharmaceutical firms that are both battling the effects of the patent cliff: U.K.-listed AstraZeneca plc (ADR) (NYSE:AZN) and U.S. company Merck & Co., Inc. (NYSE:MRK).

1. Value
The easiest way to lose money on shares is to pay too much for them — so which share looks better value, AstraZeneca plc (ADR) (NYSE:AZN) or Merck & Co., Inc. (NYSE:MRK)?

Metric AstraZeneca Merck
Current price-to-earnings ratio (P/E) 9.9 22.0
Forecast P/E 9.2 12.2
Price-to-book ratio (P/B) 2.6 2.5
Price-to-sales ratio (P/S) 2.2 2.8

AstraZeneca plc (ADR) (NYSE:AZN) looks like a clear winner in the value category, offering investors the chance to buy into the company at a P/E ratio well below the market average. Although AstraZeneca’s lower P/E suggests that investors believe the company’s earnings might continue to fall, AstraZeneca plc (ADR) (NYSE:AZN) has a lot of cash, little debt and a determined new management team. This combination of advantages should help it to fund the acquisition and development of the new drugs it needs to replace key products which lose their patent protection this year.

2. Income
With low interest rates set to continue for the foreseeable future, dividends have become one of the most popular ways of generating an investment income. How do AstraZeneca and Merck & Co., Inc. (NYSE:MRK) compare in terms of income?

Metric AstraZeneca Merck
Current dividend yield 5.6% 3.9%
5-year average historical yield 5.5% 4.3%
5-year dividend average growth rate 8.4% 2%
2013 forecast yield 5.9% 3.9%

AstraZeneca takes a clear lead in the income stakes, as its 5.6% dividend yield is 45% greater than Merck’s 3.9% yield. Looking ahead, the picture remains the same, and Astra’s stronger historical growth rate is also in its favor. AstraZeneca’s dividend has quadrupled its dividend since 2003, whereas Merck’s remained on hold from the third quarter of 2004 until the final quarter of 2011 — that’s a long time without a pay rise!