GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) won’t be in the doldrums forever.. Here are five ways it could make you rich.
1) By proving that patience is a virtue
Anybody who saw Glaxo as a fast route to riches has had a disappointing five years, with the share price up just 27% in that time. This stock is a slow burner. It is designed to give your portfolio a warm glow, rather than light fireworks. That said, performance has been underwhelming. There have also been unwarranted shocks, such as the recent Chinese bribery scandal. Even a £1.35 billion cash injection from the sale of Lucozade and Ribena has failed to add fizz. The ultimate ‘buy and forget’ stock has been a buy to forget lately. But there are good reasons why your patience should ultimately be rewarded.
2) It’s in better shape than it looks
Glaxo has just posted a 4% rise in core earnings per share (EPS) of 112.2p for 2013 and a 5% rise in the dividend of 78p. It returned £5.2 billion to shareholders via its dividend and £1.5 billion of share buybacks. And the business continues to throw off cash, generating £4.8 billion in cash flow. Markets were happy enough, although it didn’t radically transform investor sentiment. The positive vibe is building, however, and you should consider buying before it hits critical mass.
3) Its drugs pipeline is growing
Glaxo has just unveiled 10 new late stage drugs covering key areas such as cancer and respiratory disease. It now boasts an “extensive” pipeline, with around 40 new molecular entities (NMEs) in Phase II/III development. Five of the six major new treatments it profiled at the start of 13 have been approved, with Glaxo accounting for 19% of FTA new drug approvals in the US, more than any other company for the fifth successive year. Converting that pipeline to approved products takes time, but management is confident of progress. Glaxo’s diversified portfolio should help retain its competitive edge.
4) Investors will remember why they like Glaxo
Given recent sluggish performance, many investors may have forgotten why they bought Glaxo in the first place. That will change, especially if that pipeline delivers. Trading on a forward P/E of 13.6 times earnings for December 2014, you aren’t overpaying for Glaxo right now. Especially with EPS forecast to grow a steady 5% this year, rising to 9% in 2015. Emerging market sales are health, rising 11% in 2013, excluding China. The China corruption scandal should steadily fade from investor memories. You may even see some capital growth, as sentiment swings in Glaxo’s favour.
5) Slowly but steadily
You know what’s coming next. The real way that Glaxo will make you rich is through its dividend, which currently yields 4.9%. By December 2015, that should have hit 5.5%. Management is also targeting up to £2 billion of share buybacks this year. Glaxo remains a solid defensive investment, and should be further helped by management’s focus on cost control, which delivered £400 million of savings in 2013. This is a mature business, for mature investors. The wealth will flow, if slowly…
