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Why I’d buy and hold dividend stocks GlaxoSmithKline plc & Taylor Wimpey plc

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This week’s FTSE 100 sell-off has wiped out all of the previous year’s gains, dropping the UK’s top index way down from a 12-month peak of a shade under 7,800 points.

That’s great news for folks who are still planning several more decades of investing, because it’s turned some truly great stocks into short-term bargains.

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GlaxoSmithKline (LSE: GSK) shares had already been falling, losing more than 15% over the past 12 months — and they’re even down 10% over five years. Glaxo famously hit the double trouble of the expiry of some key patents coupled with increasing generic competition a few years ago, and has been revamping its development pipeline ever since.

And what’s disappointed investors is that the return to earnings growth looks like it might be short-lived, with the rises of the past two years predicted to partially reverse in 2018.

Slow recovery

With competitors having effectively had a five-year head start while Glaxo set about rebuilding itself, getting back into a commanding position is proving trickier than expected. The dividend for which the company is famous has been pegged for four years in a row, and with earnings not picking up as hoped, it’s surely coming under pressure with many fearing a cut.

Those worries are real, but I believe they are already factored into the share price, and then some. The forecast 6.1% yield for 2018 would be covered 1.35 times by earnings, so if there is a cut I’d expect it to be only a small one.

And full-year results this week showed an 11% EPS increase for 2017, which is ahead of expectations, after revenue rose 8%. That puts the shares on a trailing P/E of under 12, and I think that’s too cheap — especially considering the long-term cash-generating prospects for the company.

What slump?

Another I see as unfairly undervalued is housebuilder Taylor Wimpey (LSE: TW), whose shares dipped sharply this week having stagnated over the past two years.

Some of that is perhaps understandable after the price more than doubled in the last five years, even with that recent poor performance, and many investors will have been taking profits from shares they consider fully valued.

Brexit-led fears for the property market are there too, though I’ve gone on about how the UK’s chronic housing shortage is not going to disappear the second we leave the EU. I won’t bore you further on that, but instead I’ll turn to the numbers.

Another great year

January’s year-end update from Taylor Wimpey painted a very attractive picture in my eyes, as chief executive Pete Redfern said: “Despite wider macroeconomic uncertainty, housing market fundamentals remain solid and our trading performance has been good.

Completions during the year rose by 5% to 14,541 (including joint ventures), with average selling prices up 4% to £264,000. That includes 2,809 ‘affordable homes’ in the mix.

The firm ended 2017 with an order book valued at £1.68bn, which was slightly down on 2016, but that’s apparently partly due to an increased rate of production.

Does that sound to you like a company that’s struggling, whose anticipated dividend yield of 7.2% looks under threat, or whose shares deserve to be on a low forward P/E of just 9.5 (dropping as low as 8.8 by 2019)?

No, it doesn’t sound like that to me either, and I reckon we’re seeing another great dividend stock made even cheaper by irrational fears.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. 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.

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