Many pundits are raving about the GVC Holdings (LSE: GVC) share price. Already above its pre-crash price, apparently it could be the best FTSE 100 recovery stock on the market right now. But, I beg to differ. I’d rather invest in the dependable dividend hero, GlaxoSmithKline.
GVC Holdings share price heading for a fall
Admittedly, like most growth stocks, GVC’s share price is showing impressive returns. Indeed, share price growth of 27% since AIM-listing in 2004 is a great achievement. Moreover, the e-gaming operator was listed on the FTSE 100 in June this year, after only 16 years in business.
However, even growth stocks with solid financial fundamentals will slow eventually. Increasing the size of a firm makes sustaining a rapid growth rate harder and harder to do. And unfortunately, GVC’s financial statements do not show a firm with solid financial fundamentals.
GVC Holdings acquired Ladbrokes Coral in 2018, increasing its revenues from £789m in 2017 to £2.9b one year later. Even when allowing for a continued internal revenue growth rate of 28%, GVC bought a company almost twice its own size. In addition, this action was shortly after its purchase of bwin.party Digital Entertainment in 2016, another firm over twice the size of GVC in revenues at that time.
Indeed, GVC Holdings has made 6 acquisitions over 14 years. But it’s these last two purchases that may be its undoing. The firm hasn’t made a net profit since 2015. Even then no profit was retained – shareholders received the entire amount, and more – all likely, debt-funded.
And the losses aren’t slowing. They’re actually getting bigger, meaning the company cannot fund its own operations. To reinforce the point, long-term debt has exploded from £14m in 2015 to £2.3b in 2019. And in the latter year, the company failed to cover its interest payments with earnings.
Some analysts are impressed by GVC’s ability to generate cash through the pandemic by its diversification, its prospects of a joint venture in the US with MGM Resorts, and its additional borrowing. But increasing cashflow by adding to your debt pile is nothing to crow about and loss-making diversification purely to bring in extra cash only extends the life support. I think GVC – and its shareholders – will regret empire-building.
Advantages of dividend hero, GlaxoSmithKline
In contrast, GlaxoSmithKline (LSE: GSK) uses its diverse businesses to produce a broad and innovative product portfolio. These qualities give their offerings a competitive advantage in their respective markets, resulting in both revenue and profit growth. GSK uses its acquisitions to improve core business, it doesn’t limit itself to only increasing its balance sheet asset holdings.
The pharmaceuticals giant is also a notable income payer with a solid balance sheet, maintaining dividends in spite of the coronavirus pandemic. It maintains a dividend cover of 1.5 times, slightly above the current average of 1.4 times, and boasts a not insignificant dividend of 4.85%. This is a very respectable amount considering the price-to-earnings (P/E) ratio is only 15. The average P/E for drug companies is around 24.
GSK is perhaps not as exciting as GVC. But it is far more consistent, both strategically and financially. And over time, stability is good for shareholder returns.
If you fancy a punt on a casino as part of an already balanced portfolio, GVC could be for you. However, I’m putting my money in the far more reliable GlaxoSmithKline. Right now, I don’t have the cash to gamble with.
Rachael FitzGerald-Finch owns shares in GlaxoSmithKline. The Motley Fool UK has no position in any of the shares mentioned. 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.