The spooky October sell-off in the broader market has left even the seasoned investors somewhat dizzy. Despite the market volatility, GlaxoSmithKline (LSE: GSK) shares have shown resilience. As analysts wonder whether a bear market is around the corner, I suggest that long-term investors consider adding GSK shares into their healthcare portfolio.
Here’s why.
When major indices come under stress, more than ever I look for companies that offer fundamental value and growth potential, as well as proven stability. Overall, GSK shares fit the criteria well.
GSK’s latest earnings release on October 31 showed a strong balance sheet and positive outlook going into 2019. The company reports revenue by three segments: pharmaceuticals, vaccines, and consumer products. Its HIV therapies continued growing and Shingrix, GSK’s shingles vaccine, became a bright spot worldwide. As GSK also managed to decrease expenses, margins have improved, contributing to the bottom line.
In June 2018, GSK finalised its acquisition of the 36.5% stake that Novartis had in the Consumer Healthcare Joint Venture. Many analysts are upbeat that this purchase will help GSK strengthen cash flows and grow its consumer products segment better.
Over the past decade, the GSK share price has been penalised, mostly because its pharmaceutical business has lagged other big pharma rivals in offering blockbuster drugs. Analysts have also been concerned about the leveraged balance sheet.
Yet, GSK management has been proactive in focusing on the priority assets of the pipeline better. For example, ‘immune system,’ which gives GSK pricing power, is now getting a higher share of its R&D budget. The company is also a leader in respiratory diseases. I believe investors realise that the GlaxoSmithKline shares offer value and that any bad news that is specific to the company is already baked into the GSK share price.
Reinvesting the healthy dividend yield of GSK shares
Income investors know that they can compound their returns through reinvesting dividends from high-yielding shares. GSK’s dividend yield is over 5% — another important reason why I believe GSK shares belong to a capital-growth portfolio.
In the past, there have been concerns about the sustainability of the high dividend yield. However, I believe that with its diverse range of products, GSK will continue its position as a high-dividend staple.
Should you still worry about Brexit?
Over the past two years, the political discourse on Brexit has dominated business and public life in the UK. Although a potential no-deal Brexit could affect GSK with a broader sell-off, I believe that by early 2019 we will have a deal that will calm the nerves and offer visibility for businesses. In the medium to long term, Brexit is not likely to have a significant detrimental impact on GlaxoSmithKline’s business model or GSK share price.
The bottom line on GSK shares
November may bring further volatility to the stock market, and I would not advocate bottom picking; however, I find GSK shares to be a compelling buy candidate at current levels. In 2019, patient value and dividend growth investors are likely to be rewarded handsomely.
