I think GlaxoSmithKline (LSE:GSK) is a great FTSE 100 company, but the share price hasn’t had a great year. In fact, compared to six months ago, a Cash ISA would have delivered a better return. However, here I’ll explain why GSK is a much better investment than Cash ISAs.
Cash ISAs
As we all know, Cash ISAs are ‘safe’ investments. At the same time, it’s obvious that they don’t offer much in the way of returns. You see, interest rates are near zero, whereas the inflation rate is estimated to average 1.19% in 2020. This means that the banks will pay you negative real interest on Cash ISAs. So your money will, in fact, fall in value over time. Ouch!
It seems to me that other assets deserve much more of your attention. The best thing I think novice investors can do is invest in the FTSE 100. On average it returns 6% per year after inflation. Not bad! But there’s one way of outperforming the broader market. You can do it by choosing high-performing companies. And I really like GlaxoSmithKline.
Why GlaxoSmithKline?
First of all, I fully agree with my colleague Peter Stephens who likes GSK too. The pharmaceutical giant may be down this year but it has great potential for growth in good times and bad. As I’ve mentioned before, healthcare is not a cyclical industry. We all want to stay healthy. So drugs are the last thing we all scrimp on.
But which pharma players should we choose? Well, the two largest healthcare companies listed on the LSE are AstraZeneca and GSK. I feel it is generally much safer to choose large companies with a long operational history.
Both of these companies have particular topical interest now too and as they’re aiming to develop and test a coronavirus vaccine. GSK has formed a partnership with France’s Sanofi on this front.
So why do I like GSK rather than AZN? If we take GSK’s current share price and divide it by the FTSE 100 firm’s 2019 total earnings per share, we’ll get a price-to-earnings (P/E) ratio of 17.2. This is quite a good P/E, especially if we compare it to AstraZeneca’s ratio of over 100.
Moreover, GlaxoSmithKline’s dividend yield of 5% also beats AstraZeneca’s 2.5% yield and the FTSE 100’s average of 4%.
And how about GlaxoSmithKline’s financial health? Well, according to Moody’s, GSK’s A2 high investment grade credit rating reflects the company’s large size and a diversified product portfolio.
The company is exposed to few patent expiries apart from Advair, which makes future earnings fairly predictable. Moody’s also sees the pipeline improving following the acquisition of Tesaro, a company specialising in oncology drugs.
And while GSK not considering increasing the dividend until cover reaches at least 1.25 times might seem bad news for shareholders, this is good news for the balance sheet and cash position following the Tesaro acquisition.
But on the downside, the credit rating agency predicts operating margins could stay under pressure on declining sales of Advair in the US due to generic competition.
This is what I’d do
Overall, given the company’s initiatives and its product portfolio, Moody’s considers GSK’s financial position to be sound. I’d also call its stock a bargain and would be happy to buy.