GSK share price: 3 reasons I’d buy this FTSE 100 stock today

G A Chester reckons there could be potential upside of over 40% on the current GSK share price, making it one of his top FTSE 100 picks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

GlaxoSmithKline (LSE: GSK), the pharmaceuticals, vaccines and consumer health giant, is a FTSE 100 stock that looks very buyable to me right now. A year ago, the GSK share price hit a high of £18.50. Today, I can buy the shares for £14 — a 24% discount.

Here, I’ll discuss three reasons why I think GSK is attractive at this level. I’ll also look at the potential risks to the investment case.

Return to revenue growth

It’s hard for a company to increase its profit, if its revenue isn’t rising or is actually falling. There’s a limit to how far costs can be cut to offset a weak top line. Following a long period in the doldrums, GSK has returned to revenue growth.

When it issues its 2020 results next Wednesday, City analysts expect to see a 1.1% uptick in revenue to £34.1bn. And they expect it to break through £40bn by 2024, giving a four-year compound annual growth rate of 4.1%.

The return to revenue growth is one reason why I think the GSK share price is attractive. The rising top line should lift profits higher at a decent clip. As such, a rating of 12 times the 2020 profit expected to be reported next week looks cheap to me.

There’s still a risk the medium-term analyst consensus could prove over-optimistic. However, I think the lowly rating of 12 times profit provides some margin of safety.

Yield at today’s GSK share price

In October, the company said: “The board currently intends to maintain the dividend for 2020 at the current level of 80p per share.” On this basis, GSK’s dividend yield is 5.7%. This generous yield is another reason why I think the GSK share price is attractive.

Not that GSK will be raising its dividend any time soon. The company advised us not to expect an increase in the dividend in the near term. It said: “Over time, as free cash flow strengthens, it intends to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x, before returning the dividend to growth.”

City analysts are forecasting free cash flow cover will reach this range in 2022. And they expect a first dividend increase in 2023.

However, these forecasts flow from the projections of revenue growth. If the top-line progress proves weaker than expected, the anticipated dividend increase may not materialise. This is a risk I can tolerate, with the yield running at 5.7%.

The GSK share price and break-up value

The aforementioned forecasts are based on the company as it is. However, GSK is planning to demerge its consumer healthcare business in 2022. This kind of break-up often realises value for shareholders, with the market rating the businesses more highly as separate entities than when they were yoked together.

The analysts’ estimates I’ve seen of GSK’s ‘break-up value’ equate to a share price in the region of £18-£20. This implies there could be potential upside of as much as 43% for buyers of the stock today. This is the third reason why I think the GSK share price is attractive.

It’s possible — but I think unlikely — that the company will do a U-turn on the separation of the consumer healthcare business. It’s also possible the demerger doesn’t crystallise the break-up value analysts currently envisage.

However, all in all, GSK’s risk/reward balance at the current share price appeals to me.

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.

G A Chester has no position in any of the shares mentioned. 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.

More on Investing Articles

photo of Union Jack flags bunting in local street party
Top Stocks

5 quality UK stocks to consider buying for the new ‘British ISA’

In theory, a British ISA would allow investors an additional £5k (on top of the standard £20k allowance) so long…

Read more »

A mixed ethnicity couple shopping for food in a supermarket
Investing Articles

4.24% yield and a P/E of just 12.1! Tesco shares look like a no-brainer buy for me

Harvey Jones thinks Tesco shares look good value after today's solid first-quarter results. He's now saving up to buy the…

Read more »

Market Movers

Why the Raspberry Pi share price is on everyone’s minds right now

Jon Smith reviews the 14% jump in the Raspberry Pi share price today as part of the successful IPO of…

Read more »

Rainbow foil balloon of the number two on pink background
Investing For Beginners

2 UK stocks that could do well out of the general election

Jon Smith runs the rule over two UK stocks that may benefit from higher spending on healthcare, consumer staples and…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Could this undervalued growth stock be the next big success story in US tech?

Shares of this US technology giant have collapsed almost 50% in 2024, but is the growth stock now an incredibly…

Read more »

Young black woman using a mobile phone in a transport facility
Investing Articles

After soaring 35% this year, is there still value in Barclays shares? Here’s what the charts say!

Barclays has been on a tear in 2024. But where does that leave investors considering buying some shares now? This…

Read more »

Light trails from traffic moving down The Mound in central Edinburgh, Scotland during December
Investing Articles

Nvidia stock has surged 3,450%. This UK investment trust owns loads!

Nvidia's recent amazing price surge has helped boost the value of this investment trust too as the chipmaker is its…

Read more »

Bronze bull and bear figurines
Investing Articles

After the general election what might happen to the FTSE 100?

Our writer’s been looking at the manifestos of the three main political parties to try and understand how the general…

Read more »