At the beginning of the week, stock markets were falling around the world. Amidst this general malaise in equities, bargains are starting to appear. However, I believe you will have to select carefully which companies you buy into.
But if chosen well, your portfolio of shares could appreciate strongly once confidence returns to shares. The question is, what should you buy? Here, I put forward two blue-chip stalwarts from different sectors: Barclays (LSE: BARC) and GlaxoSmithKline (LSE: GSK). It’s the bank vs the pharma company. Who will win?
Although I respected him as a chief executive, I never really felt that Anthony Jenkins understood the Barclays investment bank. I suspect that was the reason he had to leave the company.
Whoever replaces him in the long term will understand that growing the investment bank is a crucial pillar of Barclays’ future success. With this in mind, I am bullish about the bank’s prospects.
Most people would agree that the financial crisis is now over. The legacy of that time, of bad debts and draconian fines and penalties, will, I think, also soon draw to a close.
The consensus also agrees with this view. A 2015 P/E ratio of 11.76, falling to 10.11 in 2016, looks cheap. Throw in a dividend yield of 2.53%, rising to 2.87%, and Barclays looks like a tempting buy. I think it is an income play with growth prospects.
There have been many false dawns with this bank. But I believe all the ingredients are in place for a strong recovery in Barclays’ profitability, which can only benefit its share price.
GlaxoSmithKline is also no stranger to false dawns. After a series of patent expiries, there was much hope pinned on the firm’s strong drugs pipeline.
However, sales of new drugs have, so far, disappointed. In an increasingly crowded market, there are increasing numbers of ‘me too’ drugs which add to profitability, but fail to match the blockbusters of yesteryear.
Take the example of Breo, GSK’s new wonder drug in the field of asthma. It has so far made little impact, taking only 5% of the respiratory illness market in the US. Meanwhile, sales of Advair have been falling.
That’s why Glaxo aims not only to increase its drugs portfolio, but improve the way it sells its products, beyond North America and Europe, to emerging and frontier markets. China and India will become increasingly important to this business.
What’s more, the company is making promising progress in areas such as vaccines, which, with the world’s rising population, is a growing market. Sales of retroviral drugs are also increasing.
Taken in the round, I see a company which is unlikely to grow at any pace, but which has a healthy dividend yield.
A 2015 P/E ratio of 16.98, falling to 15.06 in 2016, looks fairly priced, but not cheap. However, the dividend yield of 6.12%, falling to 6.07%, appeals. I see this as an out-and-out dividend play.
Foolish bottom line
So do you go for the cheaper P/E ratio, or the higher dividend yield? Would you plump for Barclays’ strengthening recovery, or GlaxoSmithKline’s global ambitions?
For me, it is the cheaper P/E ratio which swings it. I would buy Barclays over GlaxoSmithKline.
Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has recommended Barclays and 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.