To best make use of a £1,000 investment, I’d focus on spending it to create a passive income. This is so I can retire early. Of course, investing this way is easier to say than to do. The trick I think is to take disposable income and invest it in shares that have income and growth potential. One share that I think fits the bill is GlaxoSmithKline (LSE: GSK).
Undervalued share price
When I previously looked at Glaxo over a month ago now, I thought it could be among the winners of any stock market recovery. That’s still my belief. To me, the shares still appear undervalued, which seems a good starting point for picking a share that can provide a passive income. It means it can be sustainable and can grow long term.
A few years of the dividend being held at 80p means Glaxo has plenty of money to throw at research and development, rather than at shareholders. While that’s disappointing for income investors in the short term, it’s much better for investors who are patient. New drugs, protected by patents, offer the best way for a pharma group to grow its profits.
It’s the path FTSE 100 pharma peer AstraZeneca took. And its share price has far outperformed that of Glaxo in recent years. It seems investors increasingly like leaner, focused businesses and that’s what Glaxo is trying to become. The journey has already started and I believe management at Glaxo can unlock further value in the coming years.
Why Glaxo is a great share for passive income
On top of its potential for a recovery in the short term, I think Glaxo’s ability to provide dividends is also very appealing from a passive income perspective. The yield is comfortably above 5.5%, which is exceptional at a time when so many companies have cut back dividends.
As the next generation of drugs come through, I’d expect the dividend to start moving back up. It’s clear Glaxo is focused on drug discovery as its future. Part of the proof of this is the fact it’s spinning off its consumer business. That in itself could create a windfall for investors.
Focus on oncology – a growth area
Also like AstraZeneca, Glaxo is taking a keen interest in oncology. The global market for cancer treatments is huge. The global oncology/cancer drugs market reached a value of nearly $167.9 billion in 2019. And it has increased at a compound annual growth rate (CAGR) of 9.8% since 2015. Covid-19 will dent that growth of course. But sadly, over the long term, the market is growing.
For GSK’s bottom line, that’s good news. The big acquisition of Tesaro at the beginning of 2019 shows its commitment to innovation in this area.
Overall, I think Glaxo is a share that combines income and share price growth potential and is well suited to buying for passive income.
