What if I told you there’s a company out there today which is expected to report earnings per share growth of over 30% this year, offers shareholders a dividend yield of more than 5% and trades at a discount to its wider peer group.
This company is included in the FTSE 100, and its name is GlaxoSmithKline (LSE: GSK).
A rocky year
It’s been an exciting year for Glaxo’s shareholders. After several years of restructuring and rebuilding the business, 2016 was supposed to have been Glaxo’s comeback year, which it was until a few weeks ago. Indeed, between the beginning of January, and the beginning of October, shares in Glaxo rallied by 25% as the company impressed investors with its steady organic growth. An earnings kick from weaker sterling also helped improve sentiment towards the firm. But since the beginning of October, for some reason, the market has turned its back on Glaxo. The shares have fallen 13% from their high and are now back at April levels.
However, despite the recent declines in Glaxo’s share price the company’s underlying fundamentals haven’t changed. City analysts are still expecting earnings per share growth of 31% this year as the company benefits from organic growth and weaker sterling. Growth of 10% has been pencilled-in for next year as well. After these two years of growth, Glaxo’s earnings per share will return to 109p, a level not seen since 2012.
These projections indicate that shares in Glaxo currently trading at a forward P/E of 15.3 and a 2017 forward P/E of 14. Meanwhile, peers such as Johnson & Johnson, Pfizer, Novartis and Sanofi all trade at P/E ratios of 20 or more.
On track to outperform
Glaxo’s high double-digit earnings growth rate coupled with the company’s relatively low valuation leads me to believe that the firm’s shares will outperform during 2017.
The City has long been sceptical about Glaxo’s ability to hit growth targets and maintain its dividend payout, which was greater than earnings per share for several years. Nonetheless, Glaxo has always proved sceptics wrong, and there’s no reason to suggest that the company’s impressive run of outperformance will stop anytime soon.
And this is why the stock is my top pick for 2017. Glaxo is a world leading pharmaceutical company with rapidly growing earnings per share, a dividend yield that’s almost double the market average of around 3.5% and an attractive valuation. In fact, if you compare the company’s current valuation to its projected growth rate, the shares look severely undervalued. Specifically, shares in Glaxo currently trade at a PEG ratio of 0.5 (a PEG ratio of less than one indicates growth at a reasonable price).
Moreover, it looks as if there’s no real fundamental reason for the recent declines in the value of the company’s shares and over the long term, Glaxo is sure to see an increasing demand for its products as the world’s population grows and ages.
