This is why I’d avoid FTSE 100 stock RBS and buy GlaxoSmithKline instead

Royston Wild explains why he thinks FTSE 100 (INDEXFTSE: UKX) blue-chip GlaxoSmithKline plc (LON: GSK) is a much better stock to splash out on than Royal Bank of Scotland plc (LON: RBS).

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I’ve spoken in depth about the risks a no-deal disorderly Brexit represents to UK-focussed banks like Royal Bank of Scotland Group (LSE: RBS). These are firms which — as the bank’s first-quarter financials showed last week — are already buckling under the strain created by uncertainty over our European Union exit.

I’m not going to touch upon this again but will, instead, look at another damaging consequence of the Brexit saga and its impact on the domestic economy. That’s flat interest rates. Profits growth at RBS et al had been held back by doveish Bank of England monetary policy long before the referendum of summer 2016. By the looks of things, we shouldn’t expect rates to be hiked any time soon.

I don’t rate it

That’s certainly the view of the National Institute of Economic and Social Research, which isn’t anticipating any upward movement in the BoE’s benchmark rate until August 2020 at the earliest. It’s just a couple of months since the think tank predicted an increase this August and I wouldn’t be surprised, in the current political and economic climate, to see its most recent prediction kicked further down the road as 2019 progresses either.

The medium-term profits outlook for RBS is far from assured then, and the planned departure of chief executive Ross McEwan within the next 12 months adds another big question mark over the bank’s direction in the years ahead.

There’s simply too many obstacles that the FTSE 100 firm has to tackle and which could derail City forecasts of solid earnings growth this year and next. For this reason, I’m happy to ignore RBS’s cheapness, as illustrated by its forward P/E multiple of 9.1 times, as well as its huge dividend yield of 4.9%, and shop for other shares instead.

A better buy

Indeed, I’d much rather splash the cash on GlaxoSmithKline (LSE: GSK). Unlike RBS, the pharmaceuticals giant’s bottom line isn’t at the mercy of Brexit and its consequences in the months and years ahead, an advantage which reflects the essential nature of its products which remain in demand irrespective of the broader economic landscape. In fact, it could be argued that Britain’s ageing population means that its sales outlook on these shores is actually rather bright.

Not that any fall in British sales in the weeks, months or years ahead would impact Glaxo to a seismic degree, given the small percentage of worldwide sales which revenues generated here represent.

In fact, I’m becoming more and more bullish over the business because of the work it’s undertaken to bulk up its product pipeline in recent years and the excellent work its lab teams continues to deliver. Just this month, the US Food and Drug Administration signed off on the company’s Dovato treatment in a move that strengthens considerably its portfolio of leading HIV-battling drugs.

As I type, this Footsie firm boasts a large 5.2% dividend yield and is pretty cheap relative to its earnings prospects too, highlighted by its forward P/E ratio of 14.1 times. If you’re looking for a brilliant blue-chip to buy today, I reckon Glaxo is one to go hunting for.

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.

Royston Wild has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Barclays. 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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