Research Note: GlaxoSmithKline

 

GSK’s share price performance has been nothing short of phenomenal over the past few months. But is the rise from 1398pgx to 1705pgx indicative that the share price has run out of steam?

glaxosmithkline

I would say that GlaxoSmithKline offers a good mixture of income vs growth potential. The current yield is a FTSE beating 4.7%, covered by earnings forecast of 1.3. All indications are that the dividend is secure for the foreseeable future, and a 1.3 time’s cover allows scope for a progressive dividend policy

Following the upward trend of the past three months GSK is now trading on price-to-earnings (P/E) ratio of 17.8, which is lower that sector peer AstraZeneca which currently trades at 22.65 (and which offers a lower yield), but still higher in general for the FTSE. On a cursory glance this would make GSK the favoured choice for investors out of pharmaceuticals, but not perhaps the best share to invest in for an investor seeking a little more risk and potential for more significant returns such as Virgin Money (http://bit.ly/2dAe8gH).

Having said that, only a portion of ones portfolio should be held in riskier assets, and you would be foolish not to consider GSK as part of your portfolio to weather the ‘dark’ days of Brexit that are ahead of us.

Bottom line profit for GSK is forecast to be 27% up year on year for 2016, with further growth of 7% forecast for 2017. Such forecasts, taken with the fact that GSK is in a market leading position in a defensive sector, and you have a recipe for upward pressure on the share price. How far will it rise is the real question – is your money better off in GSK, or the likes of Virgin or Easyjet (http://bit.ly/2dhcEWQ)

Those two companies may not be your cup of tea given the reent slump in the pound and Brexit hysteria doing the rounds. Indeed GSK has proven itself quite resilient to negative press. In August Pharmaceuticals across the sector took a battering of when Hilary Clinton commented on Mylan increasing the cost of EpiPens more than 6 fold.

It’s wrong when drug companies put profits ahead of patients, raising prices without justifying the value behind them.

That’s why I’ve put forward a plan..to address exorbitant drug price hikes like these. As part of my plan, I’ve made clear that pharmaceutical manufacturers should be required to explain significant price increases, and prove that any additional costs are linked to additional patient benefits and better value. Since there is no apparent justification in this case, I am calling on Mylan to immediately reduce the price of EpiPens.”

With Hilary ahead in the polls and with Pharmaceuticals in her sights following such a transparent greed driven price increase, the entire sector was nervous, and investors sold into this uncertainty. Testament to the defensive nature of the sector, GSK bounced back strongly from – or should I say “shrugged it off”, despite it looking every more likely that Clinton will be the next US president.

I think the question is not whether you should hold GSK, but how much of your portfolio it should form.

 

Would you like me to research another company

I’m happy to take requests to research other companies, whether it be FTSE or AIM – just leave me a message on the contact page and I’ll either get back to you with a rough time frame , or do crack on with it straight away.

 

*disclaimer

I do not presently hold a position in GSK as I maintain my policy of keeping a portion of my portfolio as cash, and I am of the belief certain other stocks will riser faster in the short term. I intend to take my own advice and take a small position in GSK shortly. I just need to decide how much.

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