Citywire for Financial Professionals
Stay connected:

View the article online at http://citywire.co.uk/money/article/a681446

GlaxoSmithKline (GSK): defensive has-been or income stalwart?

Fund managers are divided over the attractions of GlaxoSmithKline, which has underperformed a soaring FTSE 100, but offers a secure dividend yield of 4.4%.

 
GlaxoSmithKline (GSK): defensive has-been or income stalwart?

GlaxoSmithKline (GSK), a stalwart member of Citywire Top Stocks, is the subject of debate as shares in the drugs giant hover around an eleven-year high.

The nub of the discussion boils down to whether GSK is too defensive and too dear if stock markets are moving to a more advanced stage of a recovery? Or is it just the sort of solid blue chip that investors need in turbulent stock markets?

In the past 12 months GSK shares have risen 22% to £17.39 (down 42p or 2.4% today). While that remains lower than the FTSE 100’s 26% rise, the appeal is in its dividend, which even after its shares' ascent, still yields 4.4%.

That is nearly 50% above the average FTSE 100’s yield of 3% with the dividends covered 2.5 times by earnings.

Gauging the top of the market 

While some managers, most famously Neil Woodford, manager of Invesco Perpetual’s Income and High Income funds, have kept the faith, and others such as Jan Luthman, manager of Liontrust's Macro Equity Income and Macro UK Growth funds, argue that the stock is due a multi-year rerating, still others, including Martin Gray, manager of of CF Miton Special Situations Portfolio and Citywire A-rated Richard Wilmot of Newton Higher Income have begun to take profits. (All the above funds apart from Newton Higher Income are Citywire Selection recommendations.)

Their scepticism might appear understandable. GSK trades at a trailing price to earnings multiple of 14.2, a significant premium to any of its European peers, excluding the smaller and more dynamic Roche and Novo Nordisk, which are priced at 16 and 20 times earnings respectively.

On comparative multiples those two stocks more than justify their tighter valuation, with a return on equity of 71.75% in the case of Swiss Roche and 68.7% in the case of Danish Novo Nordisk, versus GSK’s 54.57%. 

Conviction falling off

Given its place in the FTSE 100, the stock is unsurprisingly a perennial feature of Citywire Top Stocks, consistently held by four of the fund managers on our panel of UK stock pickers.

However, their levels of conviction about the stock has fallen sharply. Only one, M&G Recovery’s Tom Dobell, continues to hold an above-benchmark weighting, at 5.5% of his portfolio, or 0.9% more than its position in the benchmark FTSE 100. Across the managers tracked by Citywire, the average GSK holding stands at 0.83% below benchmark.

More generally, market returns have turned sharply toward cyclically exposed businesses over the six weeks, and away from defensively orientated stocks such as GSK.

Charles Stanley analyst Rae Ellingham said she remained broadly positive on the company, which yesterday announced the €250 million bolt-on acquisition of Swiss-based Okairos to boost its vaccines business, but that she would look for a lower entry point than the current multi-year high.  

‘Despite subdued short-term growth, we stay with our "accumulate on weakness" recommendation,’ said Ellingham.

‘New product sales are encouraging, sales in the US are gaining momentum, the pipeline is strong, the share buyback programme has been maintained, cash generation and dividend growth are healthy and additional financial benefits are yet to be realised from restructuring efforts.

‘The potential also exists for investors to be rewarded from the divestment of GSK’s Lucozade and Ribena brands, and also potentially down the track, from the divestment of the newly established Global Established Products portfolio.’  

5 comments so far. Why not have your say?

Eugen

May 29, 2013 at 16:12

GSK is priced at this moment without taking into account the investments in getting new drogs on the market. All investors are concerned about the expiring patents. Any new discovery, and the cash flow that coud result comes in for free. I will carry on holding GSK.

report this

David West

May 29, 2013 at 17:32

If it's good enough for Neil Woodford it is most definitely good enough for me.

report this

Ricardo

May 29, 2013 at 18:37

GSK sees a far safer bet than AZ which always seems to have problems getting its drugs to market

report this

snoekie

Jun 01, 2013 at 11:09

I had been watching GSK for some years now, but never felt that I had sufficient funds to be able to get a decent holding, until last year, and I bought in that what I thought was relatively expensive price of £14.20 p.

Had I started buying bits as far back as 2007, I would now virtually have doubled my investment. I have been watching it rise from under £10 to the price that I actually bought it. Also around that time, Astrazeneca was about £18. The latter is not a company that I would now further invest in (I have a relatively small holding, inherited, it seems to have been resting on it's laurels..

Because of the potential in GSK's pipeline, I think that there is further scope for further rises.

report this

Tony Peterson

Jun 01, 2013 at 16:00

GSK is my largest investment by value, and my favourite. It delivers to us annually several thousands in (usefully quarterly) dividends, acquired at an average price of £11.80, though my holding has reduced a little through profit taking to clear my CGT-free limit over the last couple of years.

I am delighted to be a stakeholder in a company whose products are extending my lifespan, and which appears to have a social conscience of sorts.

I am unlikely to either sell more, or buy more, at current prices, but should the shares take a big hit in one of these occasional ill-informed panics, I would be happy to increase my stake.

report this

leave a comment

Please sign in here or register here to comment. It is free to register and only takes a minute or two.

News sponsored by:

The Citywire guide to investment trusts

In association with Aberdeen Asset Management

Fund managers from Standard Life Investments quizzed on investment trusts


What can SLI bring to the table for those who want to put their money into investment trusts?

More about this:

Look up the funds

  • M&G Recovery A Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • CF Miton Special Situations Portfolio Ret A Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Liontrust Macro Equity Income R Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Liontrust Macro UK Growth R Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Newton Higher Income Inst GBP Acc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Invesco Perpetual Income Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Invesco Perpetual High Income Inc
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the shares

  • GlaxoSmithKline PLC
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Novo Nordisk A/S
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Charles Stanley Group PLC
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

Look up the fund managers

  • Neil Woodford
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Jan Luthman
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Martin Gray
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Richard Wilmot
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them
  • Thomas Dobell
    Register or Sign in to receive email alerts for items in your favourites whenever we write about them

More from us

Archive

Today's articles

Tools from Citywire Money

From the Forums

+ Start a new discussion

Weekly email from The Lolly

Get simple, easy ways to make more from your money. Just enter your email address below

An error occured while subscribing your email. Please try again later.

Thank you for registering for your weekly newsletter from The Lolly.

Keep an eye out for us in your inbox, and please add noreply@emails.citywire.co.uk to your safe senders list so we don't get junked.

Read more...

FTSE brushes past 6,500 as Fed relief rally continues

by Gavin Lumsden on Dec 19, 2014 at 17:24

Sorry, this link is not
quite ready yet