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Why GlaxoSmithKline plc is a growth bargain I’d buy and hold for 25 years

Image: GlaxoSmithKline. Fair use.

With the FTSE 100 trading close to a record high, finding good value blue-chips is becoming more difficult. In many cases, large companies may offer bright growth prospects with resilient business models, but they simply have a margin of safety which is too narrow to merit investment.

However, GlaxoSmithKline (LSE: GSK) appears to be somewhat anomalous in that respect. It has a potent mix of income, value and growth potential which could see it outperform the wider index over the long run. As such, within a healthcare sector that contains a number of stocks with high valuations, it could be worth buying and holding for the long run.

Growth potential

While the company has experienced a somewhat mixed number of years that have seen its bottom line decline at times, the outlook for the business appears to be positive. There has been significant investment in its pipeline which has created growth opportunities for the long term. It has also rationalised its pipeline, with around 33 programmes set to be cancelled. This should allow the company to focus to a greater degree on the opportunities which present the best risk/reward ratios for the long run.

Income prospects

A growing bottom line could allow GlaxoSmithKline to increase dividends payments over the medium term. It has held dividend payments steady at around 80p per share in recent years, but with its dividend coverage ratio expected to be around 1.4 in 2017, it could afford to pay a higher proportion of profit to investors and retain its reinvestment potential. This could boost its income prospects and make its 5.8% dividend yield seem even more attractive to investors.

Value

With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of 12.4, it seems to offer a wide margin of safety. That’s especially the case since it is a diversified business which has a number of different growth avenues in the long run, with its vaccines, pharma and consumer goods divisions offering the potential for rising earnings in future.

This valuation compares favourably to other healthcare companies, such as Craneware (LSE: CRW). It has a P/E of 38.5 and yet is forecast to record a rise in its bottom line of just 5% in the current year.

The value cycle solution specialist in the US healthcare market announced the renewal and significant expansion of an existing contract with a growing hospital operator on Tuesday. The $6m win is expected to deliver $3.5m of incremental revenue over the next five years and shows Craneware is making progress with its strategy.

It has a strong position within its key markets and could post continued growth in earnings over the medium term. However, with such a high valuation, it seems to be worth avoiding at the present time.

By contrast, GlaxoSmithKline’s mix of income, growth and value marks it out as a strong investment opportunity within the healthcare space, and it may be worth holding for the long term.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Craneware. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.