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A 6% FTSE 100 dividend yield I’d buy for my ISA and never sell!

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Scene depicting the City of London, home of the FTSE 100
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There are no sure things in the stock market. But I believe that FTSE 100 pharma group GlaxoSmithKline (LSE: GSK) currently offers a lot of upside potential with only limited risk.

This popular dividend stock currently trades on just 11 times earnings. I don’t think this valuation reflects Glaxo’s high profit margins, valuable brands, and promising drugs pipeline. Some patience might be needed. But with a 6% dividend yield on offer, I’m comfortable taking a long-term view.

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I hold Glaxo shares in my Stocks & Shares ISA. I don’t ever expect to sell the shares and may buy more in the coming weeks. This is why.

3-for-1

The first thing to realise about GlaxoSmithKline is that it’s essentially two businesses. Possibly even three.

The FTSE 100 group’s pharmaceuticals division is the largest part of the business, accounting for about half of all sales. It sells prescription medicines and specialist drugs, such as cancer treatments. Cancer is an area where the company is currently increasing its R&D spending.

Glaxo also has one of the world’s largest vaccine businesses. The group’s portfolio of childhood and adult vaccines are used by many national vaccination programs. Around 2m doses of vaccines are distributed every day to more than 160 countries. Vaccines generate around one quarter of sales.

The vaccine and pharmaceutical businesses sit well together. But the third part of Glaxo’s business is completely different. The consumer healthcare division sells non-prescription products such as Sensodyne, Panadol, Nicorette and many more.

Hidden value?

For many years, investors have pressured this FTSE 100 group to break itself up. Now it’s happening. GSK is preparing to separate the consumer healthcare business into a new company, probably in early 2022.

I expect the consumer business to be attractive to investors. It should generate stable sales, good profit margins, and plenty of cash. I think investors are likely to apply a higher valuation to the consumer division once it’s separated from GSK. Shares in the new consumer business could perform well. I intend to hold onto mine after the split.

Why I’m buying this FTSE 100 stock

GlaxoSmithKline shares currently trade on just 11 times forecast earnings, with a dividend yield of almost 6%. In comparison, FTSE 100 rival AstraZeneca trades on more than 20 times forecast earnings, with a dividend yield of just 2.8%. The main reason for the difference is that AstraZeneca is delivering strong growth. GSK isn’t.

To fix this, CEO Emma Walmsley has increased spending on R&D and made a number of acquisitions. The group’s R&D pipeline now contains 40 new medicines and 18 vaccines. There have been a number of positive results from clinical trials this year. I expect that over the next few years, sales of new products will help return the business to growth.

In my view, GSK’s share price could rise significantly if this happens. We’ve already seen this with AstraZeneca, whose share price has doubled in five years.

I don’t mind waiting for GlaxoSmithKline. I think this FTSE stock has the potential to deliver strong returns from current levels.

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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK 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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