Should You Buy GlaxoSmithKline plc, Diploma PLC & Merlin Entertainments PLC?

Are these 3 stocks ripe for investment? GlaxoSmithKline plc (LON: GSK), Diploma PLC (LON: DPLM) and Merlin Entertainments PLC (LON: MERL)

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For many investors, the most appealing thing about GlaxoSmithKline (LSE: GSK) is its dividend yield. That’s because it stands at over 6%, which is over 200 basis points higher than the FTSE 100‘s yield of just under 4%. As such, the company’s income appeal is significant even though dividends are set to flat line over the next couple of years.

A reason for a lack of strong dividend growth moving forward is, of course, a change in strategy which is seeing GlaxoSmithKline implement a major overhaul to its cost base and to the structure of its business, although it has stopped short of spinning off its lucrative HIV treatment subsidiary ViiV Health Care. This restructuring should allow the company to become more efficient and focus on its product pipeline, which is among the most diversified and most appealing in the industry, with it having the potential to significantly boost GlaxoSmithKline’s profitability over the medium to long term.

Due in part to such major changes as well as poor investor sentiment resulting from pressure on sales in recent years from generic treatments, GlaxoSmithKline trades on a forward price to earnings (P/E) ratio of just 15.5. This indicates upward rerating potential – especially as investors continue to be nervous regarding the future prospects for the wider economy. As such, and while GlaxoSmithKline is a top notch yield play, it also has value and growth appeal, too.

Technical products producer Diploma (LSE: DPLM) is up 15% today after releasing an upbeat set of full-year results. Pretax profit increased by 4% even though currency headwinds led to a softening of sales in the second half of the year. In fact, Diploma’s acquisitions made a real difference to its performance and it believes that a more favourable environment for acquisitions could lead to improved results in future.

Looking ahead, Diploma is forecast to increase its bottom line by just 3% in the current year and, with its shares trading on a P/E ratio of 17.7, it appears to be fully valued. Clearly, a well-covered yield of 2.7% has some appeal, although on a relative basis there appear to be more enticing opportunities available elsewhere.

Meanwhile, theme park operator Merlin (LSE: MERL) has had a rather disappointing year, with its shares falling by 2% year-to-date. A key reason for this is the 1% fall in earnings which is forecast for the current year and which appears to have dampened investor sentiment in recent months.

Next year, though, Merlin is expected to post a rise in its bottom line of 15% and this puts it on a price to earnings growth (PEG) ratio of only 1.3. With its geographically diversified operations and range of attractions, it appears to be well-placed to cope with a potential downturn in the wider economy. And, with there being few (if any) stocks operating in the same space which are also listed on the FTSE 350, Merlin could prove to be a sound diversifier for Foolish investors over the coming years.

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.

Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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