GlaxoSmithKline plc isn't the only pharma stock worth investing in for retirement

GlaxoSmithKline plc isn’t the only pharma stock worth investing in for retirement

This company could generate high returns alongside GlaxoSmithKline plc (LON:GSK) (GSK.L).

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 5 March, 2018 12:15 pm GMT

| More on: ERGO

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.

The pharmaceutical industry continues to offer significant growth potential for the long run. With the world population forecast to continue growing, there could be higher demand for a wide range of treatments. And with the demographics of the world shifting towards an older population, demand for medicines could increase substantially in the long run.

As such, GlaxoSmithKline (LSE: GSK) could prove to be a worthwhile purchase for retirement. However, it’s not the only pharma stock that could be worth buying right now.

Mixed update

Reporting on Monday was specialised pharmaceutical services and drug development company Ergomed (LSE: ERGO). Its share price fell by around 7% following the release of a trading update. The main reason for this seems to have been the fact that its EBITDA (earnings before interest, tax, depreciation and amortisation) is set to miss expectations. It is due to be £0.9m lower than guidance of £6m due to foreign exchange fluctuations and higher-than-expected R&D expenses.

Despite this, the stock appears to be performing well overall. Its service business saw revenue growth of 35% in 2017, while an order backlog of £88m is up on the previous year’s figure of £70m. This suggests that the company continues to have growth potential over the medium term.

In fact, Ergomed is due to deliver a rise in its bottom line of 77% this year, followed by further growth of 54% next year. Despite such rapid growth potential, it trades on a price-to-earnings growth (PEG) ratio of just 0.3. This suggests that it could offer growth at a reasonable price – especially with the long-term growth potential that seems to be on offer within the healthcare industry.

Margin of safety

Clearly, GlaxoSmithKline does not offer the same level of earnings growth potential as Ergomed. However, it does appear to have a solid risk/reward ratio due to the diversity of its pipeline. This could mean that it offers resilient growth potential in the long run, and that its share price performance is less volatile than for many of its sector peers.

In addition, GlaxoSmithKline has strong income prospects. It currently has a dividend yield which is over 6% and that is expected to be covered 1.4 times by profit next year. This suggests that there could be scope for increasing dividends over the long run. This could help investors to not only overcome heightened levels of inflation, but may also mean that it can provide a high level of income into retirement for many investors.

With GlaxoSmithKline trading on a price-to-earnings (P/E) ratio of around 12, it seems to offer excellent value for money. Its low rating relative to the wider sector suggests that it could have a wide margin of safety, while providing the potential for significant share price growth in future years. As such, now could be the perfect time to buy it.