GlaxoSmithKline (LSE: GSK) has a market capitalisation of over £90 billion, making it one of the 10 largest companies listed on the London Stock Exchange. Since its founding in 2000, from the merger of Glaxo Wellcome and SmithKline Beecham, the company has been returning real value to its shareholders.
GSK has been regularly paying dividends for years. In fact, its annual payment has consistently grown at a compounded annual growth rate of roughly 3.4% over the past 10 years. Last year, the pharmaceutical giant yielded 4.4% in dividends. I believe these characteristics make it ideal for income investors.
In comparison, a good easy-access cash ISA may give you returns of 2%. I don’t know about you, but I know where I would invest my money.
A strong business base
GSK’s business base is strong. Consider the fact that the company has succeeded in diversifying its revenue sources over the years. Apart from pharmaceuticals, GSK is into vaccines and healthcare consumer products, too.
Moreover, what is interesting is the huge commitment that the company has been showing towards research and development (R&D). In fact, currently it is reinvesting much of its cash flow into that. GSK spends close to £4 billion on R&D every year to remain relevant in the industry and develop a competitive edge.
Consequently, if there is a pharmaceutical company that will keep its place in the coming years, I believe it is GSK.
Investment in GSK is for the long haul
GSK has found itself in troubled waters in recent years. For the past five years, earnings per share (EPS) have been rapidly falling. The company has been investing heavily in R&D to update its pipeline of drugs.
Last year the stock price delivered almost 30% in return. Its R&D investments are for the intermediate to long term, so only patient investors will gain I believe.
Why I’m a buyer
GSK is a solid income stock. The drug company currently has a stunning 4.4% dividend yield. For years its annual payout has been roughly 61% and as much as 89%. Hence, apart from its declining EPS concern, GSK easily makes my watchlist.
But what about the declining EPS? The first cause is increasing competition. For example, in 2019 GSK had its Advair – a bronchodilator used to prevent symptoms of asthma and chronic obstructive pulmonary disease – challenged by the approval of a generic competitor in the U.S.
Next is its heavy investment in building its products portfolio. In December 2018, for instance, it started the acquisition of Tesaro, an oncology-focused pharmaceutical firm, for $5.1 billion.
Apart from these, the past years have actually been good for GSK. Therefore, the company’s falling EPS should not be a concern at all. And 4.4% is a lot better than 2%, don’t you think?
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Pi De Jonge has no position in any of the shares mentioned but will be opening long positions in the future. 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.