In my series examining some of the FTSE 100‘s top shares from the viewpoint of a novice, today I want to tell you why I think GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) should be a serious contender for your cash.
I’m not concerned with the company’s current valuation, but instead I’m looking at important long-term investment characteristics. And one of those is where a company comes in the pecking order in its business.
In a field like pharmaceuticals, it takes great clout to make the big differences, and to be secure a company really needs to be among the biggest. As well as big successes, you also need to deal with periods of relative drought, and you need the financial muscle to handle it.
GlaxoSmithKline certainly has that. With an £80bn market capitalization, it’s more than twice as big as its FTSE 100 competitor AstraZeneca. It’s the fifth-largest company in the whole of the FTSE, and the fourth-largest pharmaceuticals company in the world in terms of prescription drug sales.
Technology
One fear facing the traditional “big pharma” business is the possibility of being overtaken by upstarts with fancy new technology, and it’s true that smaller nimbler operations could make, say, massive genetic breakthroughs with much smaller initial cash needs.
But that’s easy: just buy them out. After all, the real cost of development lies not in making the initial discovery, but in getting it past approvals and actually onto the market — it can easily cost half a billion dollars or more from start to finish.
And that takes me on to what I see as another of Glaxo’s key strengths. The firm has been pursuing a strategy of buying up promising-looking small companies for some time, especially in developing biotechnology fields, and it’s almost sure that at least some of those will pay off.
Long term
Sure, there’s going to be some volatility in GlaxoSmithKline shares — its drug development cycle is way longer than the City’s short-term investment horizon, and profits will inevitably vary from year to year. So you need to be prepared for that.
But over the longer term, I think you should be pretty safe. And like most shares I’d think of as good for novices, Glaxo pays a good dividend — over the past five years its yield has varied between 4.4% and 5.5%, and it looks set to continue in that range for at least the next couple of years.
Fashion? Nope
And that kind of brings me back to the beginning, and a last key point in Glaxo’s favour — the business it is in. Technology shares have their moments, and may even do well for years, but technologies tend to become obsolete. And a few business, like retail for example, are often affected by the vagaries of fashion. But there will always be a big market for medicines, and getting cured is never going to go out of fashion.