GlaxoSmithKline plc Shares Could Be Worth £26

With the Pfizer bid for AstraZeneca in the news so much (and thankfully finally off the table), GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) has been a bit neglected.

But if you ignore the UK’s biggest listed pharmaceuticals firm (it’s worth almost twice the value of AstraZeneca), you could be missing a great investment opportunity. I’ll tell you why in a moment, but first let’s consider the slightly rocky past few years.

gskEnd of patents

Earnings have been a little erratic, and that’s partly down to the loss of patent protection on some big-money drugs. But with the multi-year cycle of drug development, we can’t really expect steady year-on-year profits of the kind we’d get from, say, an electricity supplier.

Glaxo is good at venturing into new biotechnology through acquisitions, and is heavily invested in its drugs development pipeline, so I think there’s little doubt that we’re looking at a good long-term company here. But what value is there in the shares?

Despite recent swings in earnings, the share price has closely tracked the FTSE 100 over five years, gaining 53% to today’s 1,641p. And it’s done it with better dividends — while the FTSE has been averaging yields of only about 3%, Glaxo has been paying around 5%.

Nearly double

With that combination of price rise and dividends, a GlaxoSmithKline share bought five years ago at 1,060p would today be worth a total of 1,989p. That’s a gain of 88% over five years — and it would be more if you’d reinvested your dividends in new shares each year.

But what about the next five years? Earnings progress is likely to be a bit smoother over the next five than the last — fewer shocks to patented drugs, a developing pipeline, and hopefully no recession.

There’s a 7% fall in earnings per share (EPS) forecast for this year, but that’s expected to be followed by a 10% rise — and if we predict an average of 10% per year for the following three years I don’t think that would be too outrageous.

Another five

That suggests EPS of 152p by December 2018, and if the shares were priced at a FTSE average P/E of 14, we’d be looking at 2,128p.

If dividends rise at the same 10% per year from 2015, we’d have an extra 471p to add to that for a total of 2,599p. That’s a 58% gain over five years — and again, reinvesting the dividends would provide even more.

That sounds pretty good to me.

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Alan does not own any shares in companies mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.