Why I’m Optimistic About GlaxoSmithKline plc’s Future

The recent sale of two of its brands makes me more bullish than ever on GlaxoSmithKline plc (LON: GSK).

Peter Stephens

Having held various senior management positions in the manufacturing sector, Peter founded his own manufacturing company in 1996. This was subsequently sold in 2007. Meanwhile, his passion for investing (which began during the privatisations of the 1980s) remains strong and he couples this with writing for The Motley Fool as a Contractor. His investment style is value-oriented; focusing on company fundamentals, as well as assessing the strength and presence of a competitive advantage. While above-average growth prospects remain very attractive, a greater focus on dividends has crept in since Peter became a part-time retiree in 2007.

Published 25 September, 2013 8:55 am BST

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.

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) is a company that I am a great admirer of, and I know that many readers are, too.

However, one of the major concerns I had about the company was whether it was fully focused on developing its impressive pipeline of drugs and, ultimately, on developing new ones.

I was also concerned that, with debt levels being rather high, would it be able to generate enough capital with which to compete on the global pharmaceutical stage? This point was especially relevant because of the onerous legal provisions that GlaxoSmithKline must budget for, and which tie-up large amounts of capital that could be used more productively elsewhere.

Both of these fears have now been allayed, with the sale of the Lucozade and Ribena brands to Japanese firm, Suntory, for £1.35 billion.

Not only does the deal allow GlaxoSmithKline to focus on its drug pipeline, the capital will help immeasurably as it seeks to see off competition from peers.

Indeed, although the amount received for the decades-old popular beverages was slightly less than many investors expected, the decision to proceed with the sale is, in my view, a logical one.

I think it’s good news for investors and, as a shareholder, I’m happy with the progress the company is making. In fact, I’m thinking of adding to my shareholding on the back of this news.

As well as the aforementioned news, I’m impressed with the yield offered by GlaxoSmithKline. The company currently pays out 61% of earnings as dividends, so there is scope for this to be increased, although the current yield of 4.4% trumps both inflation and bank savings accounts quite comfortably.

In addition, shares are currently inexpensive on a relative basis. The price-to-earnings (P/E) ratio is 13.9, which compares favourably to the FTSE 100 on 15 and to the wider healthcare industry group on 17.1.

Furthermore, earnings are forecast to grow by 2% this year and 9% next year, showing that there is more to GlaxoSmithKline than just a yield.

So, the recent news on the sale of Lucozade and Ribena, as well as an attractive yield, relatively cheap valuation and impressive growth prospects are making me think about buying more shares in GlaxoSmithKline.