This Makes Me More Bullish On GlaxoSmithKline Plc

Recent news surrounding an investigation by Chinese authorities makes me more keen than ever on GlaxoSmithKline plc (LON: GSK).

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As an investor, something I try desperately to avoid is making huge losses.

Sounds obvious, but what I mean is I try to avoid those huge mistakes that cost investors dearly.

Sure, everyone makes the odd error and buys stocks that underperform their respective sector or index. However, over the years I’ve learnt that the big failures are difficult to come back from and, as such, I avoid them at all costs.

So, I was slightly concerned when I read that GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) was being investigated by Chinese authorities for its marketing and sales practices. Indeed, the allegations go back a number of years and say that the company used sales practices that were illegal and were designed to make Chinese doctors choose GlaxoSmithKline’s products over rivals.

It is also alleged by the Chinese investigators that this practice has kept the prices of various drugs artificially high in China, meaning many of its people have missed out on medical treatment they should otherwise have had.

GlaxoSmithKline has said that it was not company policy to do so and that, if the allegations are correct, it is a result of rogue employees rather than a company-wide issue.

So, I was pleased to read recently that the investigation has been widened to include three of GlaxoSmithKline’s peers. Obviously, I am looking at this issue only as an investor and am certainly not saying that such alleged problems are a good thing on any other level.

However, it means that the practices could be part of an industry-wide issue. Going back to the statement regarding avoiding ‘huge mistakes’, this is clearly good news for GlaxoSmithKline’s shareholders because it is less likely that the company will be viewed as solely responsible. A sudden, sharp share price fall is, therefore, less likely.

The three other companies that are being asked for further information are Lundbeck, Sanofi and Novo Nordisk. The requests relate (as they do with GlaxoSmithKline) to the pricing and marketing processes of the companies. Meanwhile, AstraZeneca and UCB have also been asked for information but it is not clear whether this relates to the same investigation.

In addition to there seemingly being less chance of a major sell-off of GlaxoSmithKline while the investigation progresses, I’m also very keen on the stability and growth of the company’s dividend.

It currently yields an impressive 4.5% and, with dividends forecast to increase to 80p per share in 2014, this means that shares could yield as much as 4.9% within 2 years.

Furthermore, dividends are well covered at 1.5x, meaning there is scope for the company to increase the payout ratio should cash flow prove to be sufficient for research and development commitments.

Of course, GlaxoSmithKline is not the only attractive income stock out there. In fact, the team at The Motley Fool has found one that it rates as The Motley Fool’s Top Income Share Of 2013.

If you’re like me and are concerned about inflation and low savings rates, then I’d recommend you click here to take a look at our best idea. It’s completely free to do so!

> Peter owns shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.

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.

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