Today has been a bad day for the FTSE 100 index. It is suffering one of its biggest dives since the March market meltdown. As I write, the Footsie hovers around 5,543, down over 185 points (3.3%) late on Wednesday. Thus, the FTSE 100 has lost almost 950 points (14.6%) since its post-crash peak of 6,484 on 5 June. Perhaps the only good news for value investors is that falling stock prices are pushing stocks deeper into the ‘cheap shares’ bargain bin.
These cheap shares just keep falling
Take, for example, shares of UK pharmaceutical giant GlaxoSmithKline (LSE: GSK), whose stock seems to be in permanent decline nowadays. GSK is not only my largest single shareholding, I’ve also owned its shares for pretty much all of the past 30 years.
Yet these cheap shares seem to be in a downward death spiral of late. Earlier this year, before Covid-19 wreaked havoc worldwide, GSK shares hit a 52-week high of 1,857p on 24 January. Then, as the global pandemic escalated, the share price crashed to close below 1,375p on 23 March. It then bounced back with the wider FTSE 100, hitting a post-crash high of 1,742p by 13 May. Ever since, it’s been on a decline. As I write, GSK shares trade around 1,308p, down 3.9% in a single day and now 67p (almost 5%) below their March low. Ouch.
GSK’s share price slipped again today
GSK stock was on the rise until noon, when the company released its latest quarterly results. GSK reported a 3% decline in quarterly revenues to £8.6bn (£0.2bn below analysts’ estimates). However, the UK pharma giant’s adjusted earnings per share rose by 1%, hitting 35.6p and beating the forecast 30.4p. This suggests that these cheap shares are trading on a modest price-to-earnings ratio of 10 or below.
Within the results was the good news that three new products have been approved since the second quarter. Also, sales at its core vaccines division were returning to normal, after being suppressed by lockdowns preventing vaccination campaigns. Another piece of good news was the decline in net debt to £23.9bn, down £1.2bn from £25.2bn at the end of 2019. Yet these cheap shares have collapsed by roughly a quarter (25%) over the past 12 months.
For me, GSK’s cheap shares are a bargain buy
Often, and especially at this time, being a committed value investor can be painful. Cheap shares in companies with strong balance sheets, lowly rated earnings and high dividend yields are being shunned by other investors. I absolutely understand why many buyers prefer to stick with exciting, momentum-driven growth shares such as US tech stocks. Yet the ever-widening gap between growth and value shares can only go so far before it snaps back towards sensible levels.
Perhaps the only good news today for existing GSK shareholders is that these cheap shares pay a delicious dividend. GSK confirmed the latest quarterly cash dividend per share at the usual 19p level, with 80p on the cards for the full year. At the current share price, this works out to a dividend yield of 6.1%, which should be irresistible to income seekers. What’s more, with GSK’s earnings per share for three quarters totalling 102p, this dividend will be comfortably covered by 2020’s total earnings.
In summary, with the stock at its lowest level since February 2018, 2020 has been cruel for GSK shareholders. That said, I’d happily buy these cheap shares today, ideally inside an ISA, to enjoy a juicy tax-free passive income to retire rich. And for future capital gains when this great British business returns to growth!