Why I’d buy this growth stock alongside GlaxoSmithKline

Defensive dividend income from GlaxoSmithKline plc (LON: GSK) could complement this stock’s growth potential.

 

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2017 was another good year for Nasstar (LSE: NASA) with chief executive Nigel Redwood describing it as “pivotal.” The company provides managed IT and cloud services to the recruitment, legal, finance, property and media sectors. Revenue rose 31% compared to 2016 and adjusted earnings per share lifted 24%. The directors expressed their confidence in the outlook by pushing up the final dividend for the year by 15%.

Reshaping the business

The stock looks quite perky today, up around 3.5% as I write. City analysts following the firm expect earnings to lift 20% during 2018, which means the current share price around 11.9p throws up a forward price-to-earnings (P/E) ratio just below 20 – a fair-looking valuation if growth is set to continue.

The firm spent 2017 moulding the business into shape to get the most from its previous three years’ acquisition activity. That focus saw the firm launch its Nasstar 10-19 Programme aimed at achieving “an increased strategic focus to create one fully integrated business.” Nigel Redwood explained in the report that the programme requires staff to concentrate on the company’s key priorities, which should help the firm hit its target of raising margins from 20% to 25% of revenue by the end of 2019.

In November, Nasstar won a contract with a 1,000-user public/private hybrid cloud customer, one of several deals in 2017 that serves to endorse the technical strategy that we adopted when embracing the integration of the public cloud into our private cloud services.” Mr Redwood thinks that move will make the firm’s offerings “very relevant and attractive” to the market in 2018.

The directors think Nasstar’s offering is becoming more attractive to larger clients, and I reckon we could see its strategic progress manifest as strong organic growth going forward. It is an interesting growth proposition and I think the stock could pair well in a portfolio alongside defensive dividend-paying pharmaceutical giant GlaxoSmithKline (LSE: GSK).

Steady trading plus potential

Nobody is expecting growth to shoot the lights out, and the patent expiry challenges faced by the likes of GlaxoSmithKline over the years have been well-reported. But I think the firm retains all of its defensive qualities. Demand for healthcare products is in a long-term uptrend and customers repurchase supplies of medicine whatever their economic circumstances, which leads to stable incoming cash flow for the company and predictable dividends for shareholders.

The dividend has held steady for the past five years, and City analysts expect earnings to contract by 5% this year before rebounding 5% in 2019. So, dividend growth in the near term seems unlikely. However, today’s share price around 1,470p puts the forward P/E rating for 2019 at just over 13 and the forward dividend yield is a little under 5.5%. It’s hard to make a case for the shares being expensive. Last month, chief executive Emma Walmsley said the company’s main priority is to strengthen the Pharmaceuticals business and the R&D pipeline. Such focus could lead to improved earnings growth down the line. While we are waiting for Nasstar and GlaxoSmithKline to deliver capital gains via their rising share prices, we could collect decent, defensive income from GlaxoSmithKline’s dividend.

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 considered so you should consider taking independent financial advice.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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