Better Buy: Eli Lilly and Co. vs. GlaxoSmithKline

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High-quality prescription drugs tend to carry hefty margins and sell well in all economic conditions. That's why income investors have sought -- and found -- safety in big pharmaceutical stocks for decades.

With high-yielding dividends and low valuations, GlaxoSmithKline (NYSE: GSK) and Eli Lilly (NYSE: LLY) are two big pharma companies that likely appeal to many income-seeking investors. But which of these pharma giants is the better buy today?

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The case for Eli Lilly

Eil Lilly has struggled to find growth for the past five years as several of its biggest cash-cow drugs lost their patent protection. Total sales peaked in 2012 at just over $24 billion, then proceeded to plunge to under $20 billion by 2015 as generic competition arrived for former blockbusters like Zyprexa, Cymbalta, and Evista. While Lilly turned to cost-cutting measures to help soften the blow, shareholders were still forced to watch the company's profits head lower.

Thankfully, the bulk of the declines from those patent expirations are finally in the rear view mirror, and Lilly's future is starting to look brighter. Growth has returned to the top and bottom lines on the back of several newly launched drugs, including the diabetes drugs Jardiance and Trulicity, a cancer drug called Cyramza, and a psoriasis drug called Taltz. The combined revenue from these next-generation compounds has more than offset the revenue losses to its legacy portfolio. Companywide sales actually grew 7% in 2017.

Lilly's pipeline should offer investors hope that the growth era is here to stay. The company currently has 18 treatment programs that are either in late-stage development trials or are already awaiting regulatory decisions. Many of these drugs hold blockbuster potential, so investors have good reason to expect sales growth can continue for the foreseeable future.

Based on modest revenue-growth forecasts, as well as its expense controls, buybacks, and other potential value-creation moves, Wall Street predicts that Lilly's profits will grow by more than 11% annually over the next five years. And the company's well-covered dividend, which currently yields 2.9%, should be icing on the cake for investors.

The case for GlaxoSmithKline

Like Lilly, GlaxoSmithKline has also struggled to move its top line higher. After companywide sales peaked in 2011 at around $46 billion, introductions of generic versions of some of its more popular drugs caused them to drop nearly 20% by 2016. The decline took a toll on net income, and Glaxo's share price has drastically underperformed the market over the last one-, three-, five-, and 10-year periods.

The company responded to the tough times by reorganizing the business and welcoming a newcomer into the CEO's corner office in an effort to shake things up. Glaxo also cut ties with non-core programs, and doubled down on the market segments that it knows best.

While we are still early days of its transition, signs are emerging that its drastic moves are working. All three of the company's main operating divisions -- pharmaceuticals, vaccines, and consumer -- posted sales growth in 2017. That lead to a 4% gain in EPS -- which isn't much, but at least earnings are heading back in the right direction.

Is this the start of a trend, or was that growth just a flash in the pan? Market watchers seem to think it is the former. The current expectation is that Glaxo will post profit growth in excess of 8% annually over the next five years on the back of drugs like HIV treatments Tivicay and Tiumeq, and its next-generation respiratory products. Glaxo's pipeline also boasts eight products in late-stage development that provide further reason for optimism.

Turning to the dividend, income investors will likely be champing at the bit to get at a yield currently exceeding 7%. Unfortunately, the company's payout ratio is a troublesome 260%. Unless earnings shoot drastically higher from here in a hurry, it is hard for me to see how its current payout can be maintained.

The better buy

While both companies are in turnaround mode, I'd happily take Eli Lilly here over GlaxoSmithKline -- if for no other reason than my faith that will continue to pay its dividend at current levels. Since many investors are likely attracted to Glaxo's stock now solely because of its extraordinarily high yield, I could see some heading for the exits if a cut is announced. That's a potential situation that I want no part of.

Besides, Lilly offers up a market-beating yield and double-digit percentage growth potential for a price that's just 14 times forward earnings estimates. Those numbers clearly suggest that Eli Lilly is the better buy.

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Brian Feroldi has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.