by Andrew Samuels
Taking a stroll into your average pharmacy inevitably puts you in contact with several products manufactured by GlaxoSmithKline (GSK). This well-known British pharmaceutical manufacturer produces both prescription and over the counter products including Advair, Wellbutrin, Nicoderm, and Lucozade. Its major competitors include Merck (MRK), Pfizer (PFE), Eli Lilly (LLY), and Bristol-Myers Squibb (BMY). Heralded for its steady management and strong dividend offerings, GlaxoSmithKline deserves to be analyzed for a spot in your long-term portfolio as an income stock.
Currently, GlaxoSmithKline is the number two manufacturer of pharmaceutical products in the world. An investment with GlaxoSmithKline provides both domestic and international exposure through a wide variety of both prescription and over the counter products. The company employs nearly 100,000 workers both in its native England and elsewhere. Clearly, this multinational corporation has the capability, distribution network, and marketing presence to provide investment gains.
The primary reasons for investing in GlaxoSmithKline are the consistent earnings and strong dividend yield offering. With interest rates on US Treasury Bonds low, it is important to find healthy companies that offer value both through earnings growth and dividends.
The company is trading around $44, near its fifty-two week high of $46.50. The $2.65 dividend payout provides a yield of 6%, which is 1.2% above their five-year average yield of 4.8%. Moreover, the 5% yield is reinforced by positive earnings data. Last year GlaxoSmithKline made $3.31 per share in 2011 and is projected to increase earnings to $3.71 in 2012 and $4.30 in 2013. The company boasts a 69% payout ratio, indicating that the majority of the company's $33 billion dollars in earnings are returned to equity holders. According to Standard and Poor's, "prescription drugs and vaccines accounted for 81% of total sales and 88% of profits in 2011."
In regards to competitors, GlaxoSmithKline offers the leading dividend yield within its industry. Furthermore, the company has exhibited solid leadership over the past several years and looks likely to maintain its role as a major pharmaceutical producer.
Some concerns that need to be taken into account when investing in GlaxoSmithKline are the health of its pharmaceutical production chain and current products that will lose patent protection. Upcoming products such as Benlysta for Lupus and Potiga for epilepsy have relatively limited markets. Products such as Valtrex will become generic within the next five years. Additionally, GlaxoSmithKline suffered a major setback when their Avandia product was recalled for producing cardiovascular problems within patients. The negative repercussions of the diminishing safety profile for Avandia could have a larger effect on GlaxoSmithKline itself. GlaxoSmithKline has been targeted by several class action lawsuits regarding safety issues concerning the drugs the company has manufactured. While this is significant because of damages caused to individuals who were prescribed the drugs and the associated negative goodwill to the company, these lawsuits are not unique to GlaxoSmithKline. Competitors Pfizer, Eli Lilly, and Merck have all been subjected to similar lawsuits over the past decade. Furthermore, changes in the pound-to-dollar exchange rate could negatively impact the company. Last, the risk factor associated with investing in a pharmaceutical company needs to be taken in to account.
For those who are looking for a safer investment with similar dividend yields, I would turn to Abbott Laboratories (ABT) or Johnson & Johnson (JNJ). Both of these companies offer dividend yields above 3% and have consistently done well in difficult economic times. Abbot maintains a beta of .23 and Johnson & Johnson maintains a beta of .45. Likewise, both of the companies offer healthy dividends and quality earnings that are known to be among the most consistent in the market. These companies are in a healthy financial situation and both look poised to maintain these characteristics moving in to the future.
Despite these concerns, I maintain an optimistic outlook for the company. GlaxoSmithKline has increased their presence in developing markets, it owns a strong product line, it has the most drugs in the late stage of development out of any pharmaceutical manufacturer, and it was recently selected by investment guru Ken Fisher as a strong dividend stock pick. Currently, developing markets have a projected compound annual growth of 13%-16%. Within domestic markets, the retirement of baby boomers should provide an increasing potential market for GlaxoSmithKline. Additionally, GlaxoSmithKline has 26 pharmaceutical and vaccine products in late-stage development. As seen in the case of Pfizer, one blockbuster drug can provide sustained earnings for an incredible period of time. Similarly, fundamental data reinforces my positive outlook towards the company. The forward price to earnings ratio of 10.41 is more reasonable than the current P/E of 27.55. Similarly, the price to earnings growth (5 year expected) is 0.76, meaning that the stock is relatively undervalued. The company also maintains a beta of .6, which provides an indication of the company's relative stability compared to the broader market. Within the next year I expect the stock price to increase to around $50.
Overall, GlaxoSmithKline should be noted for its above average dividend yield and consistent earnings. Regardless of the success of its upcoming drug compounds, the expanding market, increasing consumer sentiment, and attractive dividend yields provide strong support for investing in GlaxoSmithKline. Likewise, I would invest in GlaxoSmithKline anywhere between the $38 and $44 mark and hold it indefinitely. Simply put, GlaxoSmithKline can provide the needed dividend yield to make your portfolio that much more attractive.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.