What You Were Buying Last Week: GlaxoSmithKline plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful“. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might provide us with some ideas for good investments.

So, in this series of articles, we look at what customers of The Motley Fool ShareDealing Service were buying in the past week or so, and explore what might have made them decide to do so.

Heading in the right direction

Since a slight slump in the first week of August, the share price of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has risen 5.7% — not bad in just three weeks. 

Mind you, the pharma giant has still lost close to 10% in value so far this year. But perhaps the recent rise was enough to convince some people that Glaxo’s share price is now heading in the right direction again.

Whatever the case, enough people bought Glaxo last week to put the company in the number 1 spot in our latest “Top 10 Buys” list*.

Generating growth

Perhaps they were persuaded by Glaxo’s pipeline of potential products. After all, it was less than a year ago that analyst-house Morningstar rated GlaxoSmithKline’s product pipeline the best of 11 leading pharmaceutical companies. 

That pipeline has already started to deliver. Glaxo  recently launched new products in two main therapeutic areas: Breo and Anoro in respiratory and Tivicay HIV, saying that uptake of the latter has been “very strong“.

And there should be more to come before too long — in July Glaxo said that it had over 40 candidate products in late stage development. And what comes could well be very lucrative — Glaxo also said that 30 of its R&D assets have the potential to be “first class” in a range of therapeutic areas. 

Of course, not all of the candidate products will make it to market — even the most promising treatments can fail in trials at the last minute. But with such a large and diversified pipeline Glaxo should be well placed to generate growth.

Indeed, analyst forecasts suggest there’ll be around 11% earnings growth in 2015, resulting in earnings per share (EPS) of 106p.  That’d put Glaxo on a forward price-to-earnings ratio of 13.7, just above the current sector average of 13.3.

Main attraction

One of the main attractions of Glaxo has always been its dividend, and nothing’s changed there. If anything, it’s got more attractive of late — Glaxo’s current yield is a massive 5.7%, which is way ahead of the FTSE 100 average, plus there will be a substantial one-off return of cash next year, the proceeds of Glaxo’s recent deal with Novartis.

Maybe a 5.7% yield seems a bit too good? Perhaps it’ll have to fall. Given Glaxo’s commitment to year-on-year dividend growth, if the dividend has to fall, the share price should rise to even things out. If the yield were to drop even just to 5% next year, and Glaxo pays out the 84p estimated by analysts, that’d give a share price of 1,680p — a rise of 15% from today’s 1,460p.

But, of course, whatever other people were doing last week, only you can decide if Glaxo is a buy right now.