I’m always keen to add a top value stock or two to add to my portfolio. I was therefore interested to see Derren Nathan, head of equity research at Hargreaves Lansdown, highlight two “unloved companies” on the FTSE 100. He said “weak investor sentiment does not reflect the longer-term prospects”.
That’s a pretty good description of value stocks and one of them is already on my shopping list, pharmaceutical company GSK (LSE: GSK).
With two earnings upgrades in 2023, GSK looks well set, but its valuation remains below the long-term average, Nathan noted. Today, it trades at just 11.2 times earnings, well below FTSE 100 pharma rival AstraZeneca’s whopping 64.98 times valuation. I know which looks more attractive to me today, and it’s not Astra. I like to buy cheap shares.
A little bit too unloved
Nathan says GSK’s “solid financial position supports a prospective dividend yield of 4.2%”, with shareholder payouts covered more than twice by forecast free cash flow, while adding the obvious proviso that no dividends are guaranteed.
So why is GSK cheap? One issue is that heartburn drug Zantac‘s alleged cancer links could still trigger legal claims, with a ruling due early next year. Another is the quality of its drugs pipeline, which it’s desperate to replenish. This has been slow going as approvals take ages and many treatments never make it to market. GSK is doing well with vaccines, notably shingles jab Shringrix, while HIV treatments make up a fifth of total revenues.
Net debt looks high to me at $17.2bn but is forecast to dip to £15.78bn in 2023 and to £12.92bn in 2024. I don’t hold any pharmaceutical stocks and it’s time I put that right.
Nathan’s second unloved FTSE 100 stock is British American Tobacco (LSE: BATS), which is hardly surprising because there’s little to love about the cigarette maker aside from its super-sized dividends it pays investors.
Still waiting to catch fire
The group is fighting hard to maintain share in traditional combustible products such as cigarettes. And cigars in its largest market, the US, which is weighing on financial performance. Other territories look brighter and the firm is increasingly pinning its hopes for the future on its portfolio of ‘smokeless’ products, like vapes.
Nathan noted that “these categories are set to become profitable in 2024, two years ahead of the original plan”. The board hopes to generate more than half of total revenues from this sector of the market by 2035.
For now, the cash is flowing. This allows it to fund investment in cigarette alternatives and reward loyal investors with generous dividends. Today, it yields a crazy 9.78% but trades at just 6.34 times earnings.
Yet I won’t buy it. I think the company faces too many challenges, particularly from tighter regulation and higher taxes. Net debt is high at £42.2bn, albeit reduced by a £4.13bn cash reserve. This has persuaded the board to put share buybacks on hold. I also suspect there will be blowback against vaping and other new category products at some point.
I’d much rather invest in GSK today, and plan to show it some love when I have a bit of cash to spare.
