Better Buy: GlaxoSmithKline PLC vs. Pfizer

GlaxoSmithKline PLC (NYSE: GSK) and Pfizer (NYSE: PFE) are both on track for record-breaking years in terms of their share-price performance. Glaxo's shares have turned sharply higher this year due to its reorganization effort that has placed a higher emphasis on consumer healthcare, as well as increasing operational efficiency across all three of its segments (pharmaceuticals, vaccines, and consumer healthcare).

Pfizer, on the other hand, has also benefited from its own restructuring plan that's likely a prelude to one or more spinoffs moving forward. Furthermore, this big pharma titan has responded positively to the U.S. corporate tax reform that's both lowered its tax rate and given it a viable pathway to repatriate billions in overseas cash.

With both of these stocks bumping up against their 52-week highs, though, it's arguably the perfect time to consider which of these big pharmas has the better chance of pushing even higher. Let's dig in to find out the answer.

The case for Glaxo

As things stand now, Wall Street expects Glaxo's top line to rise at a respectable 4% on average per year for the next six years. This mid-level revenue growth is expected to be powered by the drugmaker's stable of high-value vaccines like Bexsero and Shingrix, its growing HIV franchise headlined by Triumeq and Tivicay, newer respiratory medicines such as Nucala, and the company's move back into oncology with the experimental BCMA antibody-drug conjugate dubbed "2857916."

In short, Glaxo has numerous potential growth drivers that should be able to offset the eventual nosedive of its flagship asthma medication, Advair, once generics do enter the market.

Equally as important, Glaxo's management is working toward de-leveraging the company after its $13 billion acquisition of Novartis' consumer healthcare segment earlier this year. This fairly larger acquisition ballooned Glaxo's debt-to-equity ratio up to a monstrous 928. Stated simply, the company basically no financial capacity remaining for additional deals.

To tackle this debt problem, Glaxo is reportedly putting its Indian consumer healthcare unit up for sale, and the early reports suggest that the drugmaker should receive upwards of $4 billion for this business before year's end. While that amount won't totally solve Glaxo's debt overhang, it's at least a step in the right direction.

Lastly, Glaxo's rather generous dividend yield of 4.86% remains a point of concern for investors. The drugmaker's cost-saving moves have improved free cash flows in recent quarters, but a dividend reduction seems almost inevitable as Glaxo aims to tie its payout to cash flow generation next year.

The case for Pfizer

Because of the continued onslaught of patent losses that's set to culminate with the forthcoming expiration of the pain medication Lyrica, Pfizer's top line is projected to rise at a compound annual growth rate of 2% over the next six years. However, that anemic forecast could be terribly misleading.

Pfizer seems to be gearing up to spin off both its consumer healthcare unit and its legacy medicines business. These two long-awaited moves would, in turn, unlock the tremendous growth potential of its innovative medicines unit.

After all, Pfizer has built a rather impressive clinical pipeline that should easily be able to generate double-digit sales growth for a sustained period of time. For example, its pipeline is on track to produce several lucrative label expansions for Bavencio, Ibrance, and Xeljanz.

The drugmaker is also co-developing a potential blockbuster pain medication, tanezumab, with Eli Lilly, and it has a number of assets in development for high-value indications such as hemophilia, nonalcoholic steatohepatitis, and cancer.

As currently constructed, however, Pfizer remains more of an income, rather than a pure growth play. Pfizer's current yield of 3.23% is still one of the highest within its peer group after all, and the company has proven to be dedicated to rewarding loyal shareholders through regular increases to its payout.

Which stock is the better buy?

Although Glaxo's plan of action is starting to bear fruit, Pfizer is clearly the better buy here. Unlike Glaxo's, Pfizer's dividend is in no danger whatsoever of a reduction. Pfizer also has a far cleaner balance sheet and its late-stage clinical pipeline is much closer to producing a slate of major new drugs. Glaxo, on the other hand, needs to address its debt problem, which is undoubtedly going to impact its capital allocation strategy going forward.

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George Budwell owns shares of Pfizer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.