4 Reasons To Buy This Top Pharma Stock For A Near 5% Yield

Nov. 5.12 | About: GlaxoSmithKline (GSK)

GlaxoSmithKline (NYSE:GSK) is a global leader in developing and marketing pharmaceuticals, vaccines and consumer healthcare products. GSK shares have been trending higher but recently pulled back, offering investors another shot at buying this solid dividend paying stock. The pullback in GSK shares appears to be primarily due to the recent drop in the stock market. In recent days, concerns over earnings and guidance have led to triple digit down days for the Dow Jones Industrial Index. While GlaxoSmithKline faces the typical risks that any major pharmaceutical company has, these seem manageable and it has a history of successfully dealing with them. Some of the risks and challenges this industry faces include patent expirations, litigation, foreign currency exchange, and the potential for failure in clinical trials for new drugs, amongst others.

Here are 4 reasons to consider buying the stock now:

1) The global economy appears to be at risk of a synchronized slowdown with signs of weakness in China, many countries in Europe in recession and the U.S. facing a looming fiscal cliff. The increased risks to the downside means investors should use caution and focus on defensive industries like pharmaceuticals, which tend to remain strong even in tough times. It also means investors might increasingly focus on dividend stocks which has been a popular investment theme that should continue to work.

2) GSK shares make sense for income investors as it currently yields nearly 5%. It also has a history of dividend increases. For example, in 2003, the quarterly dividend was just 29 cents per share. Thanks to regular increases, the quarterly dividend is now about 53 cents per share. Since the payout ratio is just around 50%, this company has plenty of room to keep raising the dividend in the future.

3) GSK's product line offers diversification by focusing on three major categories. Prescription medicines which include treatments for infections, depression, skin conditions, asthma, heart and circulatory disease and cancer. Vaccines such as hepatitis A, hepatitis B, diphtheria, tetanus, and many others. Consumer healthcare products which include some very well-known brands like: Abreva, Aquafresh, Binaca, Citrucel, Commit Lozenge, Nicorette, Os-cal, Polident, Poligrip, Sensodyne, Tums, and many others. This broad product portfolio provides a stable source of revenues and it reduces risks for shareholders since the company is not dependent on just a few products or categories.

4) GSK shares offer a compelling valuation when compared to other stocks. It has a dividend that yields nearly 5%, and it trades for just about 10 times earnings. The S&P 500 Index trades at nearly 14 times earnings, and yields just over 2%. Other pharma stocks also highlight the value of these shares. For example, Merck (NYSE:MRK) yields considerably less (about 3.6%) and the stock trades for about 12 times earnings. This shows that GSK shares could have upside potential.

Here are some key points for GSK:
Current share price: $44.86
The 52 week range is $41.50 to $47.70
Earnings estimates for 2012: $4.09 per share
Earnings estimates for 2013: $4.43 per share
Annual dividend: $2.11 per share which yields 4.7%

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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.