GlaxoSmithKline plc: Even ‘Safe’ Stocks Have Their Dangers

There is, of course, no such thing as a safe stock to invest in. You only have to whisper the word Marconi, the ill-fated UK telecommunications company, to win that argument. Or point to the wildly swinging fortunes of top FTSE 100 stocks such as BP, Tesco, WM Morrison, Lloyds Banking Group and Royal Bank of Scotland Group.

Pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) certainly isn’t going the way of Marconi. Investors happily pop it into their portfolio with the aim of leaving it there for years, barely even glancing at the share price, while letting the dividends and growth roll up. They are right to do so. But even Glaxo isn’t safe. 

Any investor who kidded themselves it was will be shocked at the 7% plunge in its share price over the past 12 months. They will be equally shocked by the reason for that drop: bribery allegations rippling out of China, which have led to the Serious Fraud Office opening a formal criminal investigation against them. It’s a murky world out there and, as the big UK banks have shown, no country has their hands completely clean. 

Damage Done

Yes, the Chinese authorities may be milking the scandal for all it’s worth it, given the dismal state of corporate governance among its own companies. But I still wouldn’t have expected Glaxo to end up as the multinational whipping boy in the state’s corruption crackdown. 

The Chinese say the scandal has done “irreparable damage to the company in China and elsewhere”. Glaxo has admitted that its own investigation did find evidence of wrongdoing, but only from individuals beyond the company’s control systems. Some kind of guilty verdict is surely baked in, given the close relationship between China’s state and judiciary. The only question is how far the scandal spreads.

If it was confined to China, I wouldn’t be too worried. Glaxo only generates around 5% of its revenues from the country. But worryingly, Glaxo could have corporate liability under the Bribery Act. That means it could also face prosecution in the UK, and possibly even the US. As BP knows all too well, no British company wants that.

Time Heals All Wounds

Naturally, this level of difficulty should alert investors, because it means you can now buy Glaxo for 7% less than one year ago. Trading at 14.8 times earnings, it isn’t exactly bargain basement, but a discount is a discount. And this one comes trailing a forecast 5% yield for December 2014.

You might want to drip-feed your investment, rather than dive straight in. The allegations are likely to continue. The scandal could spread. So buy on the dips, sit tight, and re-invest the dividends for turbo-charged growth while waiting for the share price to rebound. Give yourself five or 10 years, preferably longer. 

Even safe stocks have their dangers. But if they didn’t, they wouldn’t present any opportunities.

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Harvey doesn't own shares in any company mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.