Glaxo Looks Attractive

For the first time ever, Stephen Bland adds a pharmaceutical share to one of his High Yield Portfolios.

It's the first article of the month so it's time for the next selection for my fourth High Yield Portfolio, (HYP) the tenth share. I'm going with drugs giant GlaxoSmithKline (LSE: GSK) because, well, it's simply the next new sector on the descending FTSE 100 yield list. That is my approach and it is based on KIS (Keep It Simple). You don't need complex selection criteria for HYP design and should be suspicious of any approach that does so.

That said, I do check a few basic fundamentals. I don't pick the next share on the list blindly or mechanically but consider a few salient matters like levels of debt and cover as well as a history and forecast of increasing payouts. And then there's whatever else I find apposite at the time.

These qualitative criteria are not mandatory though, and I will sometimes trade off a lack of them in return for a super high yield. In addition to letting the numbers talk to me, I also seek the crucial requirement of sector diversification as new shares are added.

The recent sharp fall in the share price of Glaxo is said by some commentators to arise from problems with their new drug Myopia*. Designed to reduce panic selling of shares by weak long term investors influenced overly by ephemeral events, an article in a respected financial journal claimed that in a few cases it was found to cause the opposite effect, actually persuading some to sell faster than the little yellow pills could be popped out of their wrapping.

As most of my readers will be aware I'm sure, I pay little attention to such stuff, rather I let strategic ignorance decide for me. By this I mean I don't know what I don't know and I don't want to know it either, if you get my drift. In consequence I am prepared to overlook the Myopia situation and see the fall in Glaxo a buying opportunity for HYPers, especially those not suffering from the condition requiring a dose of this drug and therefore prepared to hold for eternity as my suggested minimum period.

Glaxo takes HYP4 into a welcome new sector both for this portfolio and, interestingly I think, all my previous HYPs. I don't think any of my previous demo portfolios have included a pharmaceutical company because the yields were never in the past sufficiently high to qualify.

My buying price for HYP4 comes to about 1,301p including costs. With a dividend forecast of 50.11p for the year to 31/12/07 the share is on a forecast yield of 3.85%. Dividends have been increasing regularly for years, for example in 2002 the company paid 40.0p and have moved upward every year since.

The other fundamentals for Glaxo stack up too. With eps forecast at about 100p for 07, my buying P/E is a modest 13, fairly cheap for a company like this I'd say, and the dividend cover is around a comfortable 2. Gearing was about 50% at the last accounts which also is not unreasonable for an HYP share. So to me the fundamentals in addition to the raw yield all stack up nicely, making this I believe a very desirable time to acquire Glaxo at HYP yield levels. Here is HYP4 to date.

Of the shares mentioned Stephen owns BAT, BP, BT Group, DSG International, Lloyds TSB, Royal Bank of Scotland and United Utilities.

*Editor's note: Stephen is obliquely referring to Glaxo's recent problems with its diabetes drug, Avandia. Regular readers will know that Stephen has always argued that Fools shouldn't be distracted by such short-term blips.