3 Reasons Why GlaxoSmithKline plc Could Shoot The Lights Out


Life as a GlaxoSmithKline (LSE: GSK) shareholder has been rather uncomfortable during 2014. That’s because the company continues to be embroiled in bribery allegations that are causing sentiment to weaken and, as a result, its shares are taking a hammering.

For instance, they are down 10% since the turn of the year, which eradicates the majority of their gains made during the course of 2013. Indeed, since the start of 2013 they are up just 7% — less than half the FTSE 100’s 15% rise over the same time period.

However, GlaxoSmithKline appears to be well-worth holding onto. In fact, it could become a star performer. Here’s why.

A Top Notch Pipeline

With all of the bribery allegations dominating news headlines, the market seems to have forgotten just how much potential GlaxoSmithKline has in its drugs pipeline. For instance, it has a long list of drugs in clinical trials and, while there is no such thing as a ‘sure thing’ in trials, the chances are that a number of those drugs have a realistic chance of being approved.

This shows that the long term future of GlaxoSmithKline looks very strong, since ultimately it is the company’s ability to develop and sell blockbuster drugs that will define its long term future. On that front, GlaxoSmithKline is very well positioned.

A Low Valuation

With market sentiment being so weak, GlaxoSmithKline’s valuation has slipped back to very attractive levels. For example, the company’s forward price to earnings (P/E) ratio is now just 15.6 and, while this is higher than the FTSE 100’s P/E ratio of 13.9, it is very attractive when compared to a number of GlaxoSmithKline’s sector peers.

A notable example is Shire, which had a P/E of over 20 when it was purchased by US rival, AbbVie. This shows that there could be considerable scope for an upward revision to GlaxoSmithKline’s rating moving forward.

Income Potential

With shares having fallen in recent months, GlaxoSmithKline is now one of the highest yielding shares in the FTSE 100. It currently yields a hugely enticing 5.6% and dividends per share are set to increase by around 4.1% next year. Furthermore, with the company’s drugs pipeline being so strong, it looks as though there is considerable potential for further brisk increases to GlaxoSmithKline’s dividends over the medium to long term.

As a result of this income potential, as well as its low valuation and impressive pipeline, GlaxoSmithKline could prove to be a top notch investment over the medium to long term.

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Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK 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.