When it comes to investing, capital preservation can be just as important, if not more important than making profits. With careful money management and diversification, investors can afford to make a few mistakes in their stock-picking endeavours and still live to fight another day.
Gung-ho
On the other hand, a careless gung-ho approach can indeed lead to unimaginable riches, but more often-than-not leads to complete financial ruin. Unfortunately with this approach, and without any money left to spend, reckless investors might not get a second chance. That’s why many people, particularly those who are new to investing, like to tread carefully and buy into what they know and understand. Defensive sectors such as consumer goods, utilities and pharmaceuticals fall into this category.
Risk-averse investors often like to park their hard-earned cash in stocks that won’t be affected by the economic cycle or political turmoil. Let’s face it, unforeseen events such as Brexit, or Donald Trump’s election win may have shaken equity markets and the currency markets, but our requirement for detergents, washing-up liquid, water, and medicines remains unshaken.
Ageing populations
One of the companies popular with such investors is GlaxoSmithKline (LSE: GSK). This FTSE 100 pharmaceuticals giant sits at the heart of many portfolios, thanks to its capacity to generate enormous profits each year, and distribute a large chunk of those proceeds to its loyal army of shareholders. For example, this year’s forecast dividend payout of 80p per share equates to a healthy yield of 5.2% at current levels, and that folks is the first and foremost reason to hold the company’s shares.
As I mentioned earlier, people will always need medicines, no matter what the political and economic climate. In fact, with ageing populations and developing nations now spending more than ever on healthcare, I believe the demand for Glaxo’s products should rise steady over the coming years. These defensive characteristics give the company a low risk profile, which would be my second reason to hold the shares.
Healthy pipeline
Finally, we come to my third and perhaps-less-obvious reason to buy a slice of this blue-chip drugmaker, and that is growth. Sales of new drugs have been very encouraging in recent years, and with many more in the pipeline, I believe that Glaxo’s future prospects look very healthy indeed.
Last month’s first quarter results revealed a 19% rise in revenues to £7.4bn, up 5% on a constant currency basis. Most encouraging was the fact that sales growth was achieved in all three of its main businesses, namely Pharmaceuticals, Vaccines, and Consumer Healthcare. Furthermore, with a continued focus on cost reduction, the group also reported improved operating margins and significantly better operating and free cash flows.
With generous levels of dividend income and an undemanding P/E rating of 14, I believe there are few better ways for risk-averse investors to generate a 5% return on their savings.