Shares in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) have had a rather muted 2014, with the pharmaceutical giant posting gains of less than 1% in the year-to-date, while the FTSE 100 is currently up around 2% in 2014.
Part of the reason for the lack of relative performance has been bribery investigations in China, with the most recent development being the charging of GlaxoSmithKline’s former China Head, Mark Reilly, with leading a network of corruption in China’s pharmaceuticals industry.
Clearly, the news is likely to dampen market sentiment in GlaxoSmithKline in the short run but, over the medium to long term, GlaxoSmithKline could still prove to be a winning stock. Here’s why.
A Super Yield
With Mark Carney hinting that the Bank of England is unlikely to be in a rush to raise interest rates, income could continue to be elusive for many investors. That’s why stocks such as GlaxoSmithKline could prove to be highly relevant, since shares in the drugmaker currently yield a highly impressive 4.8%. This easily beats inflation and is vastly higher than the rate any high-street savings account can offer. As such, demand for GlaxoSmithKline’s shares should remain buoyant – even as further details surrounding the corruption allegations emerge.
A Great Pipeline
Although stablemate AstraZeneca has been grabbing all of the headlines of late, with the Pfizer bid highlighting the attraction of its drug pipeline, GlaxoSmithKline has a top-notch drug pipeline, too. Late-stage trials conducted over the last couple of years have been generally positive and GlaxoSmithKline has a strong track-record of successful new drug applications and approvals. Furthermore, its pipeline is well-diversified and should be strengthened (in time) by increased capital and focus on this area as it exits consumer businesses such as Ribena and Lucozade.
A Potential Bid Target?
With shares trading on a price to earnings (P/E) ratio of 14.6, GlaxoSmithKline seems to offer good value for money. Although slightly higher than the FTSE 100’s P/E of 13.8, when the high dividend yield, pipeline opportunity and strong cash flow of GlaxoSmithKline are taken into account, it could be argued that shares are undervalued. As a result, GlaxoSmithKline could become a bid target, once there is more clarity on developments in China.
So, while the short run may see market sentiment dampened further, GlaxoSmithKline could be a winning stock.
