European drugs stocks offer growth potential, income and value, according to blue-chip broker Bank of America Merrill Lynch, which today named GlaxoSmithKline (LON:GSK) as one of its top large-cap picks.
Bayer (ETR:BAYN) and Novo (CPH:NOVO) were its other key calls, while Sanofi was upgrade to ‘buy’. There was no such luck for long-time laggard, AstraZeneca (LON:AZN), which marked down to ‘underperform’.
“We maintain our positive view on the EU pharma sector,” Merrill said in a note penned by the pharma team.
“In an uncertain macro-environment we believe its mix of accelerating growth, high yields and cash returns and attractive valuation should drive continued outperformance, or re-rating.”
The near-term outlook for the sector doesn’t look too clever, based on the Merrill analysis with zero earnings growth predicted this year as companies recovers from a wave of patent expiries.
Thereafter things pick up markedly with EPS expected to expand by 7-8 per cent a year between 2013 and 2016.
The revival will be driven by fewer expiries, improvements in research and development productivity and an increase in revenues from non-pharma and emerging markets.
This it is hoped will lift the sector price to earnings ratio to 12 times collective EPS, which points to a 12-month total return of around 17 per cent, the broker said.
The improving fundamentals are enhanced by these companies’ ability to generate huge amounts of cash, and therefore dividends.
The giants of the sector are currently yielding between 5 per cent and 7 per cent – well in excess of the rate paid by the best savings accounts.
“We expect capital returns to continue to improve and see dividends as secure,” said Merrill.
“With bond yields staying low and dividends in other traditional yield sectors such as financials and telcos having been reduced, pharma now accounts for 11 per cent of Stoxx600 dividends, making it an increasingly important source of income.”
At 2.30pm, Glaxo shares were changing hands for £14.06, down 2 pence on the day in a generally lacklustre market in which pharma stocks were static. Rival AZ was down 18 pence at £29.05