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Why GlaxoSmithKline plc is my FTSE 100 stock pick for the next decade

I reckon all UK stock investment portfolios are best if based on a solid selection of FTSE 100 companies, ideally from several sectors to spread the risk. But I’m occasionally asked which would be my choice if I could only hold one.

In the past I’d have gone for BP or Royal Dutch Shell, bacause energy is never going to go out of fashion and they’ve been dividend cash cows for decades. They’re still great long-term investments, but stubbornly low oil prices knock them off my top spot now.

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More recently my favourite has been Lloyds Banking Group, which I’ve held since before the Brexit shock — and though the share price is down, I’m happily taking my growing dividends. But the shambles that Brexit is turning into mean Lloyds could be in for a volatile couple of years.

Today’s favourite

The one that really has been catching my eye lately is GlaxoSmithKline (LSE: GSK). I’ve been following Glaxo for a few years now. That’s ever since earnings growth at the pharmaceuticals giant went into reverse when the firm was hit by the expiry of some key best-selling drugs and by increasing competition from generic alternatives. AstraZeneca suffered similarly and the two have been pursuing a programme of beefing up their drug pipelines.

The corner now seems to have been turned by Glaxo, as the company reported a 35% rise in earnings per share last year. But a slowdown to a forecast of 8% growth this year followed by a 2% shrinkage in 2018 and fears of a dividend cut appear to turned investors away, and the shares have slipped in value to 1,314p.

We’re looking at a forward P/E multiple based on 2017 forecasts of only 12 — and with long-term growth potential, I reckon it deserves a rating in excess of the long-term FTSE 100 average, which stands at around 14.

And Glaxo’s dividend, which has been maintained at 80p per share throughout the downturn, is currently set to yield 6%, which is around twice the FTSE 100 average.

Third quarter

At Q3 time, chief executive Emma Walmsley spoke of “sales growth and improved operating margins,” after new product sales rose by 40% to £1.7bn. I think that’s quite impressive at this stage, after a quarter that saw total sales of £7.8bn, as it’s laying the foundations for profits from the company’s next generation of products.

And we’re seeing a constant stream of development progress, with the company’s new COPD treatment Trelegy Ellipta approved for use in the US and the EU, and its Shingrix shingles vaccine being approved in the US and Canada. A US approval application has also been made for another COPD treatment, mepolizumab, with filings for other markets planned for this year and next.

As for the dividend, I’m optimistic and I see improving cash flow as being able to cover good returns over the long term. But even if there’s a cut, I’d still expect a decent yield to be maintained — and reinvesting the cash should help boost research and growth.

I reckon if you pick Glaxo or AstraZeneca, couple that with BP or Shell, maybe choose a bank if you’re not of a nervous disposition, add a dividend-paying energy firm (National Grid would be my choice) and top it off with an insurer (I hold Aviva), you’d have a very sold core portfolio.

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Alan Oscroft owns shares of Aviva and Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, BP, Lloyds Banking Group, and Royal Dutch Shell. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.