This FTSE 100-beating investment trust could be a better buy than GlaxoSmithKline plc

Roland Head suggests a long-term alternative to FTSE 100 (INDEXFTSE:UKX) pharma giant GlaxoSmithKline plc (LON:GSK).

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investing in individual stocks can be very profitable. But it’s also time-consuming — and the reality for many of us is that there just isn’t enough time in the day to research all the stocks we might want to own.

I believe that a mix of investment trusts and stocks can be an ideal approach for long-term investors. This provides upside potential from successful stock picks, plus valuable diversification and stability from investment trusts.

50 years of dividend growth

FTSE 250-listed Caledonia Investments (LSE: CLDN) has increased its dividend every year for the last 50 years. Very few individual companies have a record like this.

The trust aims to provide a mix of long-term capital growth and a reliable income. To achieve this, Caledonia invests in a mix of listed and unlisted businesses in the UK and overseas. Among the trust’s UK investments are FTSE 100 firm British American Tobacco, and FTSE 250 soft drinks group AG Barr.

During the first half of this year, the trust’s net asset value per share climbed 1.1% to 3,298p. This means that the trust’s current share price of 2,723p represents an 18% discount to the value of its underlying assets.

Investment trusts often trade at a discount to net asset value, and this isn’t necessarily a buying signal. But in this case I believe it could be a good opportunity. Caledonia has outperformed the FTSE 100 by 18% over the last 10 years, and by 50% over the last five.

This market-beating performance suggests to me that the trust’s managers have successfully focused on top-performing sectors of the market, avoiding those which have underperformed.

Although the dividend yield of 2% is fairly modest, remember that the payout has increased every year for the last 50. I believe this is a stock you could tuck away and hold forever.

What about Glaxo?

I sold my shares of GlaxoSmithKline (LSE: GSK) earlier this year, as did fund manager Neil Woodford. And I was interested to see that Glaxo isn’t among the 1%+ holdings in Caledonia’s investments either.

The pharma group’s share price performance has fallen by 17% this year and is 4% lower than five years ago — a period during which the FTSE 100 has gained 27%.

The group has clung onto its reputation as a high-yield stock by maintaining its 80p per share dividend, which provides a tempting prospective yield of 6.1%. However, this payout hasn’t been increased since 2013. Such a long period without an increase is often a sign that a dividend is getting hard to afford.

One way to view Glaxo’s weak growth is that it does too many different things. By operating a consumer health business and a pharmaceutical division, there’s a risk that management isn’t focused closely enough on either business.

Several big fund managers have called for the group to consider splitting itself up, which could result in a higher overall valuation than at present.

So far, management have resisted these calls. But with profits expected to fall next year and net debt stubbornly high, chief executive Emma Walmsley may soon come under increased pressure.

In my view, there’s no rush to invest in Glaxo. I’d wait until the group strategy becomes clearer before considering a buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AG Barr. 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.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »

Investing Articles

Investing £5 a day could help me build a second income of £329 a month!

This Fool explains how £5 a day, or one less takeaway coffee, could help her build a monthly second income…

Read more »

Smart young brown businesswoman working from home on a laptop
Investing Articles

2 FTSE income stocks investors should consider buying in April

Income stocks are a great way to build wealth. Our writer details two picks she believes investors should consider snapping…

Read more »

Investing Articles

What might the 5-year price chart tell us about BT shares?

Christopher Ruane considers what clues the long-term performance of BT shares might offer him about business performance and whether to…

Read more »