Warren Buffett, who is widely considered to be the best investor in the world, says that he will only buy stocks when he is sure that the underlying business can continue to produce returns for investors for many years to come.
This means he tends to stick with businesses that have robust competitive advantages or defensive characteristics.
I think GlaxoSmithKline (LSE: GSK) meets this test. As one of the world’s largest pharmaceutical companies, demand for the group’s products should only increase going forward as the world’s population continues to grow and more money is devoted to healthcare.
Research and development
Glaxo has spent billions over the past few years reinforcing its position in the market. Moreover, under the stewardship of its relatively new CEO Emma Walmsley, the company has refurbished its research and development efforts.
Rather than spending money on a range of different projects with uncertain outcomes, Glaxo is concentrating its R&D efforts on a few key areas such as vaccines, where it has an established reputation as a reliable supplier.
These actions to streamline the group’s R&D process, are already having an impact on the bottom line.
Overall sales in the third quarter rose 11% to £9.4bn, beating consensus expectations of about £9bn. Vaccines turnover grew 15% to £2.3bn, primarily driven by growth in sales of Glaxo’s shingles treatment, Shingrix, sales of which jumped 76% in the quarter.
The company is also on track to start selling a new drug, Dostarlimab in the next few months. Designed to treat advanced or recurrent endometrial cancer, Dostarlimab was one of three drugs Glaxo outlined as being pivotal to its future growth at the beginning of 2019.
The other two were Zejula and Belantamab. They’re both oncology treatments acquired when Glaxo bought Tesaro last year.
The launch of new respiratory medicines Nucala and Trelegy are also helping drive sales growth at Glaxo’s respiratory business.
Glaxo’s performance this year outlines why I think this stock should feature in your retirement portfolio.
As long as the company continues to invest in its treatment pipeline, new products should continue to power sales growth for many decades to come.
And even if the company only grows in line with the rest of the global healthcare industry, I think the stock has the potential to return around 10% per annum for the next decade or so.
Indeed, according to research from Deloitte, global healthcare spending is set to increase by around 5% per annum to the middle of the next decade.
If the company’s earnings grow in line with this projection, I think the stock could return around 9.6% per annum when you add in the 4.6% dividend yield to earnings growth.
This kind of growth is worth paying a premium for, so I think Glaxo’s current P/E of 14.4 isn’t too demanding and could move higher if the company continues to beat City growth expectations.
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Rupert Hargreaves owns no share 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.