FTSE 100 pharmaceutical giant GlaxoSmithKline (LSE: GSK) is often branded as a stock to buy and hold forever. But the shares have actually performed quite poorly for much of the last 25 years.
Over the last 10 years, shares in the pharma group have risen by just 30%, compared to a 63% gain for the FTSE 100.
These figures don’t include dividends, but data provided by Morningstar indicates that over the last 10 years, Glaxo stock has provided an average total return (share price + dividends) of just 6.3% per year. The equivalent figure for the FTSE 100 over the same period was 9.3%.
Big changes are coming
Given Glaxo’s rather ordinary track record, you might wonder why I’m suggesting it as a potential buy. The answer lies in the changes set in motion by chief executive Emma Walmsley since March 2017.
The group’s diverse mix of pharmaceuticals, vaccines and consumer healthcare brands has been blamed by many in the City as a cause of underperformance. Simply put, many investors think the group lacks focus. Weaker divisions are supported by profits made elsewhere.
Ms Walmsley appears to share this view and has set a series of changes in motion that will see the consumer healthcare business combined with that of Pfizer. This joint venture will then be spun out into a new company at some point in the next three years.
Why buy Glaxo today?
At about 1,560p, the GSK share price is well below its five-year high of 1,700p+. The planned break-up should leave shareholders with a more tightly focused pharmaceutical business, with much lower levels of debt.
The shares currently trade on about 13.5 times 2019 forecast earnings,with a 5.1% dividend yield. I believe the stock could deliver strong returns from this level as the group’s transformation plays out over the next few years. In my opinion, this could be a good time to buy.
Good company, wrong price?
One business I’ve rated highly for a number of years is FTSE 250 meat producer Cranswick (LSE: CWK). Back in October I said that I thought the shares looked expensive, based on forecasts for modest earnings growth.
News released on Thursday seemed to justify my caution. The firm warned that profit margins were likely to fall next year, due to the cost of building a new poultry factory and “a potentially challenging commercial landscape”.
Before this news was released, analysts were expecting the group’s earnings to rise by about 5% in 2019/20. My reading of this new guidance is that profits are more likely to be flat next year.
Cranswick’s share price fell by 13% on Thursday, as investors priced in the risk of slowing growth. However, the shares are still trading on around 17 times 2019 forecast earnings, with a 2% dividend yield.
I view this as a good, defensive business that could be a long-term holding. But I think the share price is probably still too high, given the weak outlook for growth. For now, I’m going to leave this one on my watch list.
