When Sleeping Giants Wake
And this particular sleeping giant goes by the name of GlaxoSmithKline.
For years, I’ve been truculent in opposing any bull case for GSK which has long been adored by UK pension investors for its defensive qualities and dependable dividend pay-outs.
For me though, it’s never quite been able to cut the mustard. But maybe I’ve been too ignorant in my stance and haven’t appreciated their true value.
You see, I’ve long held the opinion that the GSK share price has never had the potential to make my clients quit their day job – it just drifts up a bit, then back down, back up and finally back down, never convincingly sky-rocketing to new multi-year highs.
And thus far, opting to place your chips with US growth unicorns vs the tried and tested value stocks has proved to be a good move. To give you an example of this, the FAANG (Facebook, Apple, Amazon, Netflix, Google) index is up 86% over the last 5 years.
Compare that with GSK.L and well nothing has changed, literally. I’ve just looked back at the GSK share price from exactly 5 years ago when you could buy a single share for £13.91. Fast forward to the time of writing and it’s £13.71. Down 20p even!
I suspect watching paint dry would be more rewarding… In fact, it is! Having been a painter and decorator for a short stint in 2017, I can confirm that it is indeed far more rewarding to marvel at a newly painted house than it is to check the share price of Glaxo.
So why an earth am I bringing GSK to your attention?
Today, I’ll be raising 4 key reasons as to why you should consider adding GSK to your portfolio:
1. The sector is deeply discounted.
Analysts at Liberum have themselves highlighted that European pharma is trading at a 40% discount to the consumer staples sector. Further to this, the London listed GSK is trading at a very meagre X11.8 its forward earnings.
Appreciated, UK defensive stocks don’t tend to trade at high multiples of their earnings given their lower EPS and general revenue growth projections, but let’s compare that to GSK’s own 5-year P/E average of 23.46.
And with this, my former loathing of GSK has miraculously disappeared and my ears have pricked up like a dog hearing the magical ‘walkies’ word. But this time the magical word is value.
Granted, their 5-year compounded annual revenue growth rate is only 7.97%, but it’s still revenue growth nonetheless and this deeply discounted valuation seems a little overdone, unfair you could argue.
The clever kids at the big investment banks agree, too. Across all the analysts who cover Glaxo, the average price target comes in at £16.93, a whole 24% higher than where it is now.
2. Great Income
Personally, I’ve never been a huge fan of dividends. Unlike many UK investors, I’d actually rather the company not pay a dividend and instead better use that cash to invest in itself for (hopefully) greater top-line revenue growth.
If you’re able to produce a product for £1, and sell it for £3, why pay those profits to investors? Why not just put that money back into creating more profitable products?
However, in saying that, I very much doubt the big wigs at Glaxo are going to read this and change up their business model based on my very analytical thesis of turning £1 into £3 Business for Dummies 101. So, we may as well play the hand we’ve been dealt and reap the rewards.
And just as the sun has risen every morning for the last 5 years, GSK has rewarded shareholders with 80p per share for keeping the faith. Normally split into three 19p quarterly pay-outs with a bumper 23p Q4 dividend.
If they continue with the 80p dividend plan, this equates to a 5.8% dividend yield. Further to this, if you’re a client of Mitto Markets, you’re eligible to opt-in for the dividend re-investment feature which just means instead of receiving cash you’ll get more shares and more dividends on those extra shares. Put this together and you get a nice little compounding uplift.
It’s important to note however, dividends aren’t guaranteed and there’s always the risk that dividend programmes can get reduced or cut altogether. Something to bear in mind.
3. Change in Market Sentiment
In recent weeks, I can’t help but notice that the tide might be changing and am seeing some down-trodden sectors starting to make somewhat of a small resurgence.
More market commentary is coming to the surface highlighting a possible bubble in equity markets which, in turn, can push some investors into trying their luck with stocks that present better value for money.
And this has been demonstrated with UK banks, oil majors and housebuilders seeing an uplift in recent months, particularly from November onwards.
If investors are growing concerned about a market bubble and we see a downward correction, it tends to be the more volatile, ultra-high P/E stocks which suffer the most. So, it’s not surprising to see some of the better value UK companies coming back into vogue.
And with that, it’s worth asking if UK pharma will be next in line to get noticed? It only takes one or two high-profile fund managers to speak positively of the sector to create the kind of catalyst to bring it to the forefront again.
4. Safety
Through the good times and the bad, we will always need the products and drugs of GSK.
Whether it’s the latest charcoal infused toothpaste or a glug of Night Nurse, you’ll be very hard pushed to not find a Glaxo product in your basket or a flu capsule coursing through your veins at some point of your life.
But it doesn’t stop at just shop-bought consumer healthcare products. GSK are responsible for producing some of the most vital treatments and vaccines which keep people alive. And this all helps provide shareholders with clear visibility of forward cash flow and income streams.
As of 31st December 2019, their ending cash balance stood at £4.8bn, which for some people is nice to know.
I raise their cash balance for good reason too. At times, if you’re a steady income investor, it can be frustrating to see the fellow investor boast of their extravagant gains with the likes of Tesla and other high-debt tech unicorns. But it’s worth remembering, there was a time last year when Elon Musk admitted that Tesla was just weeks away from bankruptcy.
If that’s your bag then great, but for others they might prefer just to sleep better knowing they don’t own a company which could implode over-night.
And that ladies and gentleman, sums up my 4 keys reasons to take a serious look at GlaxoSmithKline.
Please be aware that this should not be considered advice. It’s simply my personal take and a stock market works both ways. So if I think it’s an interesting investment idea, I’m sure there’ll be a naysayer out there in internet land to counter my points.
However, if you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call +44 (0)208 159 8985
Now before you go, I want to bring to your attention a NEW and exciting FX strategy which has just been launched to the public. R2 is an algorithmic strategy which utilises quantitative analysis to identify poor performing retail trading trends and capitalises by taking a proportionate opposite position.
It’s a well-known statistic that 75% of retail FX traders will lose money when making, often, emotionally led trade decisions. R2 seeks to take advantage of this poor performance whilst filtering anomalies and managing risk daily.
R2 started trading in August 2020 and has so far posted total return of +16.6%.
If you’d like to know more about R2 and how to invest, please click on the following link for a full fact sheet. (https://www.mittomarkets.com/s/R2-Factsheet-2021.pdf)
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.