Investors in GlaxoSmithKline (LSE: GSK) have had a truly dismal 2014. Shares in the pharmaceutical company are down 12% since the turn of the year, with the FTSE 100 being flat over the same time period. What’s made it all the more disappointing for shareholders of GlaxoSmithKline is that the year kicked off with such optimism after the company made gains of just under 20% in 2013.
Indeed, GlaxoSmithKline was moving along nicely: it had a great pipeline, was selling off its consumer businesses to focus on research, and the future looked bright. Now, bribery allegations in China have left a cloud of uncertainty over the company and its future prospects. Investors, though, should not despair, since GlaxoSmithKline could be worth 1690p per share. Here’s why.
It’s difficult to quantify the growth potential of a drugs pipeline. That’s because even drugs that perform extremely well in early-stage trials can fail late-stage trials, which introduces a large degree of uncertainty into any pharmaceutical company’s future. However, GlaxoSmithKline has a highly diversified and potentially lucrative drugs pipeline that could propel the company onto far higher levels of sales and earnings than at present. In the short term, this means growth forecasts of 6% next year, which is in line with the wider index and could increase significantly over the medium term as the company’s pipeline is further developed.
Despite GlaxoSmithKline’s strong potential, shares in the company currently trade on a price to earnings (P/E) ratio of just 12.6, which is below the FTSE 100’s P/E of 13.4. Furthermore, GlaxoSmithKline offers a dividend yield of 5.7%, which is above the FTSE 100’s yield of 3.5% and shows that shares offer excellent value for money at current prices.
Indeed, GlaxoSmithKline has a history of strong dividend per share growth, with it expected to increase by 4.1% next year alone. This means that, at present prices, GlaxoSmithKline would yield 6% next year. This level of yield is unlikely to last indefinitely and even if GlaxoSmithKline were to yield 5% next year (which is still a lot higher than the FTSE 100’s yield of 3.5%), it would equate to shares trading at 1690p. This is 19.6% higher than their current price level and seems to be a very realistic target price for investors over the medium term. Shares have been this high before – as recently as March of this year – so it seems to be a very achievable level for them to reach.
Clearly, a 5% yield would still be a hugely attractive yield for what is one of the biggest and most profitable pharmaceutical companies in the world. Indeed, with bribery allegations unlikely to last beyond the short to medium term, now could be a great time to buy shares in GlaxoSmithKline. A top income and realistic growth potential could prove to be a highly potent combination moving forward.
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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.