Legendary US fund manager Peter Lynch once wisely remarked, “Never fall in love with a stock; always have an open mind”. But it’s fair to say that many investors do have favourite shares – and one of mine is a pillar of the FTSE 100.
My favourite FTSE 100 shares keep falling
In recent weeks, I have repeatedly written about FTSE 100 stocks that I consider ideally suited for value and income-seeking investors. The pattern seems to be: I write about a ‘bargain bin’ FTSE 100 stock, its price falls, and the share becomes even cheaper.
Of course, I’m not afflicted by any kind of stock-picking curse. The root cause is the fact that the wider FTSE 100 index has fallen roughly 470 points (7.25%) since its recent peak on 5 June. Also, my style of value and dividend-driven investing is very much out of favour these days.
GlaxoSmithKline is a dividend dynamo
High on my list of favourite FTSE 100 shares is British pharmaceutical giant GlaxoSmithKline (LSE: GSK). I’ve owned GlaxoSmithKline shares for most of the past 30 years, going back to the early 1990s.
Perhaps, as Peter Lynch cautioned, I’ve fallen in love with this stock and have become biased and blind to GSK’s faults? I honestly don’t think this is the case, because this FTSE 100 share stacks up, no matter which way I analyse the underlying business.
As I write, and in today’s falling market, GSK shares trade at £15.48, down 25p (1.6%) since yesterday’s close. Therefore, GSK is worth around £1.2bn less today than it was yesterday (but on no new corporate information and for no particular reason).
My 5% Rule for GSK
Having watched GSK grow enormously since the 1980s, I’ve adopted what I call my ‘5% Rule’ for buying this FTSE 100 share.
For the past five years, GSK has paid a rock-steady dividend of 80p a share (plus a special dividend of 20p for 2015). At £16 a share, this equates to a dividend yield of 5%. Thus, when GSK shares drop below £16, their yield exceeds 5%. Conversely, the yield falls below 5% when GSK’s share price exceeds £16.
At today’s price of £15.48, GSK’s dividend yield has crept up to 5.17%, while its market value has declined to £78.9bn. Hence, according to my 5% Rule, GSK is now back in buying territory.
GSK is a FTSE 100 dividend beast
With almost 5bn shares in issue, paying out 80p a share in cash dividends costs this FTSE 100 firm around £4bn a year. This makes GSK one of the FTSE 100’s top-five dividend players. In fact, GSK’s dividend alone will account for up to 7% of total dividends paid by all UK-listed companies this year. This incredible figure demonstrates GSK’s sheer financial strength.
GSK’s next dividend of 19p will be paid on 8 October to investors who own this FTSE 100 share on 13 August.
GSK shares are cheap
Ignoring my ownership bias and long history with GSK, would I buy its shares today? Indeed I would, because the business is doing well and has a bright future. Yet GSK shares are down 6% in the past 12 months and are over £3 cheaper than their 52-week high of £18.57 hit on 24 January.
During the market’s March meltdown, GSK shares tumbled to £13.28 (on 16 March), boosting their dividend yield to above 6%. They were a bargain at the time and, based on my 5% Rule, my family bought even more.
Today, GSK shares trade on a price-to-earnings ratio of 11.8 and offer a dividend yield approaching 5.2%. Hence, I would buy and hold this FTSE 100 value share until the cows come home.