If you’re tired of BT (LSE: BT-A), Vodafone (LSE: VOD) and AstraZeneca (LSE: AZN), then GlaxoSmithKline (LSE: GSK) and Unilever (LSE: ULVR) could be valid alternatives at their current levels. Here’s my quick take on these five behemoths.
BT Or Vodafone?
As I recently argued, you must be patient with BT, although you may be enticed to cash-in now to pursue alternative growth opportunities after a rally that’s taken BT’s share price up over 20% since its one-year trough near the end of last year.
By comparison, I’d sell Vodafone immediately if I ‘d invested in it at its one-year low in October, thus recording a 22% capital gain over the period.
Of the two, BT remains my preferred choice.
At 449p, its relative valuation based on its forward earnings stands at 15x. Its shares do not look expensive, although you may be concerned, and rightly so, about its pension deficit and execution risk associated to its pricey acquisition of EE.
At 3% BT’s forward yield testifies to an investment that may continue to grow at a relatively low pace, but its payout ratio looks safe regardless of how much growth is left in the business.
I’d probably retain exposure to BT rather than investing a penny in Vodafone — as far as the latter is concerned, I am not a big fan of its growth rate, a cash flow profile that could hurt its payout ratio and a rich valuation that reflects takeover rumours rather than strength in its fundamentals.
Also consider that based on its forward net earnings, its shares trade between 66x and 40x over the next two years.
That’s a lot for a sluggish conglomerate. It remains a trade for technical analysts, not for me.
Astra Is Expensive
Astra is my least favourite pick in the pharmaceutical space, although its stock has rapidly fallen (down 15% since April), just as I expected when it peaked and in previous coverage.
Frankly, I’d be prepared to snap up its shares at around 3,400p, or 17% below their current price.
If I’m right, you’ll have then the opportunity to consider its stock at around 23x–20x forward earnings, which is better value than now if earnings estimates are met, although its recent trading updates and fundamentals suggest you ought to be cautious even if its valuation plunges from £41p to the low 30s.
Your plan B would be to stay put, betting on a takeover. But I’m afraid that wouldn’t have my support.
Glaxo & Unilever: So Different, So Similar
The problem with Glaxo is that its management team is slow to react to changes, while investors need changes and a more aggressive capital allocation strategy to back a company whose stock has gone nowhere for a very long time now (one-year performance -14.5%; two-year performance -21%; five-year performance +18%).
Investors want a New Glaxo with a more focused assets base. Give them spin-offs, special dividends, buybacks, deals, action — anything, really!
That said, its relative valuation is much lower than that of Astra, and offers a decent entry point for value hunters looking for yield. Moreover, Glaxo has financing options when it comes to its dividend policy, which is a good thing — even though its earnings profile leaves little room to the imagination, sadly for the bulls.
Finally, Unilever. This remain one of my favourite long-term bets in this market in the light of steady earnings generation, rising dividends backed by hefty cash flows and manageable net leverage.
Its management team has my full backing, and it could not be otherwise, although Unilever would do well to consider a more aggressive capital allocation strategy — a special dividend perhaps?
There’s room to go down that route. I think, given that working capital management could surprise investors over the next questers, boosting its cash flow profile — all of which points to an investment that should certainly be included in a diversified portfolio at its current level of 2,716p a share.
