GlaxoSmithKline plc (GSK): The Perfect Tonic for Troubled Markets

LONDON — If you can keep your head while everyone around is losing theirs, you probably hold shares in GlaxoSmithKline plc (LON:GSK). Last week’s market mayhem won’t have troubled this pharmaceutical giant’s loyal army of long-term investors — you don’t measure an investment like Glaxo in days, but years and years.

GlaxoSmithKline plc (LON:GSK) is just the tonic in troubled times. As markets fret over Japan’s last throw of the monetary dice and the Federal Reserve’s plans to unwind QE, defensive investors will be pondering their options. Cash remains on the sick list. Gold bugs have been stung. Bond investors fear a bubble. Defensive FTSE 100 blue chips such as Glaxo shine by comparison.

You can get 2.5% on cash right now, but only if you lock your money away for five years with a bank you’ve never heard of. If you want easy access, you’ll barely get 1.5%. Right now, GlaxoSmithKline plc (LON:GSK) yields a far healthier 4.2%, with any share price growth on top. Better still, management hiked the dividend 6% to 18 pence in the first quarter: No savings account has such a progressive attitude to its customers. Share-price performance has been solid rather than spectacular. GlaxoSmithKline plc (LON:GSK) is up 24% over one year, against 27% for the FTSE 100, but nobody buys this stock to gorge themselves on growth. You invest to line your portfolio’s stomach and for those juicy dividends. Yet Glaxo has still risen a tasty 52% over the last three years, against 33% for the index

Glaxo aids recovery
Glaxo does have some problems. Sales and earnings have dipped slightly, and the global government spending squeeze won’t help. It is under investigation by the OFT for allegedly abusing its dominant market position over antidepressant treatment Seroxat, a charge that GlaxoSmithKline plc (LON:GSK) denies. But it has a healthy drugs pipeline and cash flow, and its plans to offload iconic brands Lucozade and Ribena could generate yet more cash to reinvest in the business or fund further share repurchases. Glaxo is already repurchasing between 1 billion pounds and 2 billion pounds of its shares. Earnings per share growth should be around 3% to 4% — decent, but hardly daredevil. That’s good enough for me right now.

Glaxo looks perfectly valued at 15.5 times earnings. That’s a little too perfect for my liking. If the bond market boos Japan offstage or Bernanke fluffs his QE exit lines, GlaxoSmithKline plc (LON:GSK) could become that little bit cheaper, while its yield would be even more generous. Now that would be a real tonic.

The article GlaxoSmithKline: The Perfect Tonic for Troubled Markets originally appeared on Fool.com and is written by Harvey Jones.

Harvey Jones owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.

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