Why GlaxoSmithKline plc Should Be A Candidate For Your 2014 ISA

GlaxoSmithKline plc (LON: GSK) should be rewarding shareholders for years to come.

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GlaxoSmithKlineSo GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has struggled a bit with the so-called patent cliff in recent years with the loss of exclusivity on some key drugs, has it?

When it comes to picking investments for this year’s new ISA allowance of £11,760, I say “So what?

Decades of cash

The reason, you see, is that for me an ISA investment is for life — and I’m far more interested in how a company is going to be shaping up over 10, 20 or even 30 years than in short-term trifles like this.

Of course, we can’t be sure any company is going to be doing well so far in the future. But with a market capitalisation of more than £80bn and as the largest pharmaceuticals company listed on the FTSE by far (AstraZeneca is £30bn behind), GlaxoSmithKline surely has a much better chance than smaller companies in more risky businesses.

Beaten by technology?

What’s that, you say? The days of blockbuster drugs companies are numbered and they’ll be eclipsed by modern biotechnology upstarts? Well, who do you think has the big money and will be making irresistible buyout offers to these newcomers when they start to look promising?

That’s right, it’s the big firms like GlaxoSmithKline. In fact, we can already see the start of it, as Glaxo has been on the acquisition trail for some time now.

And, you know, even the shorter term looks pretty reasonable for Glaxo right now.

Not expensive

We’ve seen erratic earnings per share (EPS) over the past few years and EPS should be flat in 2014, but there’s modest growth of 8% forecast for 2015. That puts the shares on a price-to-earnings ratio of around 14-15 over the next couple of years — in line with the FTSE’s long-term average of about 14, and a bit below the current forward average of 17.

And when we look at Glaxo’s dividends, which provide a yield of around 5% when the FTSE 100 average stands at 3%, the shares are looking attractively-priced to me.

So how much would £1,000 invested in Glaxo be worth in 20 years time?

The value of compounding

_ISA1If we assume the share price will grow in line with the FTSE’s long-term average of around 5% per year and that we reinvest a dividend yield of 5% in more shares each year… we’d be looking at £6,700 after two decades!

To put that into perspective, the same cash in a savings account offering a typical 1.7% would net you a measly £1,400.

In fact, I like GlaxoSmithKline so much I have it in the Fool’s Beginners’ Portfolio, which is run very much with the same long-term strategy that I advocate for ISA investors.

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.

> Alan does not own any shares in GlaxoSmithKline or AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.

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