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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%.
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.’
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by Gavin Lumsden on Apr 16, 2014 at 15:17