Could You Double Your Money With GlaxoSmithKline plc?

The FTSE 100 has risen 27% over the last five years. However, some companies have done much better than others. In fact, more than a third have seen their shares rise 100% or more.

I’m currently looking at some of your favourite blue chips and analysing their prospects for doubling your money in the next five years. Today, it’s the turn of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

The last five years

GSK’s shares have fallen a long way short of doubling over the last five years. And, with a rise of 18%, they have delivered just two-thirds of the gain recorded by the FTSE 100.

GSK’s share price rise represents a compound annual growth rate (CAGR) of 3.3%. Earnings per share (EPS) have increased at a CAGR of just 1.4%, with the remainder of the share price rise coming from an increase in the price-to-earnings (P/E) ratio. GSK currently trades on a P/E of 13.2, compared with 12.0 five years ago.

The next five years

For GSK’s shares to double in the next five years, a 15% EPS CAGR would be required at a maintained P/E of 13.2. Anything less than 15% and the P/E would have to rise to make up the difference.

As things stand, EPS is actually set to fall for the current year, by a whopping 17%, giving a P/E of close to 16 at today’s share price of 1,477p. This means the EPS CAGR for the subsequent four years would need to increase to over 18% at a maintained P/E of 16.

Given that GSK is coming through a period of patent expiries, the historic five-year EPS CAGR of 1.4% is unlikely to be a good guide to the company’s future capabilities for earnings growth. However, even when GSK was on a roll, through the best part of last decade, the EPS CAGR was only as high as 8% — way short of the growth required for the shares to double in the next five years.

Could GSK’s P/E rise still higher to make up the difference? Let’s say analysts are on the mark with their 17% fall in EPS for the current year, and GSK then returns to an 8% CAGR for the four subsequent years. What would the P/E need to be five years from now for the shares to have doubled? The answer is around 23. That’s even higher than the premium bid rating given to AstraZeneca this year by Pfizer‘s offer.

On this basis, I think we’re unlikely to see GSK’s shares rise 100% over the next five years. Still, the company’s defensive “steady-Eddie” qualities are attractive for many investors, and a juicy 5.4% dividend yield (and potential income growth) on top of the performance of the shares is not to be overlooked.

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G A Chester has no position in any shares mentioned. 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.