Why GlaxoSmithKline plc Is A Top ISA Buy

GlaxoSmithKline plc (LON:GSK) could reward you with gains the taxman can’t touch.

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It’s not often you can get away with not paying tax, but your annual ISA allowance allows you to do exactly that. Pick the right share and lock it way in an ISA for a decade or two, and you could see a healthy return on your initial investment that the taxman can’t touch.

So, what makes a good share for an ISA? Ideally, it needs to be one that will appreciate in capital value. But re-investing dividends is also a great way to generate money, so a high-yielding share makes a great choice, too.

Here’s why I think GlaxoSmithSkine (LSE: GSK) (NYSE: GSK.US) would make a great candidate for your 2014 ISA.

GlaxoSmithKlineFirstly, Glaxo is a huge company — the biggest pharmaceutical company listed on the London Stock Exchange, in fact. That means it has the huge resources needed to invest for the long term, which is essential for success in its industry. Analysis last year by Forbes put the cost of getting one new pharmaceutical product to market at up to $5bn by the time you’ve accounted for all the ones that didn’t make it. Only the biggest companies can afford to play at this game.

Surviving the fall

Over recent years, the big-hitters of the pharmaceutical sector have all been affected by their various ‘blockbuster’ products — ones that generate more than $1bn of revenue a year — falling out of patent-protection, with no replacements in the pipeline, leading to the companies tumbling over what’s become known as the ‘patent cliff’.

But Glaxo wasn’t as badly damaged by the fall as some of its competitors, because it had been busy diversifying away from the traditional ‘blockbuster drug’ revenue model, and embracing newer biotechnology-oriented avenues to deliver more cost-effective products.

Indeed, it’s been getting approval for new treatments that should create a steady stream of sales over the next umpteen years, including its Tivecay HIV treatment, which could prove to be a significant revenue generator.

Top pipeline

Better still, only last November the analyst-house Morningstar rated GlaxoSmithKline’s product pipeline the best of 11 leading pharmaceutical companies, with its potential treatments in the areas of oncology and respiratory diseases being seen as key strengths.

And Glaxo has also been disposing of non-core, non-global brands that were distracting it from its main activities. For example, it sold the Lucozade and Ribena drinks brands to Suntory last autumn, and came away with £1.35bn that it can re-invest in its core consumer healthcare business.

Glaxo’s products fall into the category of “consumables” — things that people buy again and again and again. And, being medicines, they’re the sort of consumables that people don’t cut-back on buying when money gets tight, making Glaxo a highly defensive stock.

Growing dividend = growing ISA

Glaxo’s current P/E of 14.7 isn’t low. But it’s 11% lower than the pharmaceutical sector average of 16.5, making it comparatively cheap for such a blue-chip company.

And then there’s Glaxo’s dividend. With around a 4.7% it’s over a third higher the FTSE 100 index average of 3.5%. And the fact that its dividend has increased by an inflation-beating compound annual growth rate of 6.7% since 2008 provides reassurance that Glaxo intends to keep growing it in the future. Re-investing those dividends in more Glaxo shares will help your ISA grow and grow.

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.

Jon owns shares in GlaxoSmithKline. The Motley Fool has recommended GlaxoSmithKline.

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