Why I’d invest in the GlaxoSmithKline share price at today’s level

The GlaxoSmithKline share price is trading at a discount to its 10-year P/E ratio and offers a dividend yield of just under 6%.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Risk reward ratio / risk management concept

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Investor sentiment towards the GlaxoSmithKline (LSE: GSK) share price has steadily deteriorated since the beginning of 2020. The shares, which were changing hands for over 1,800p at the beginning of 2020, are worth less than 1,400p today. 

This performance suggests the company has had a rough time of it this year. But that’s just not the case. In fact, Glaxo’s underlying fundamental performance has been significantly more robust than many other FTSE 100 businesses. 

Sales under pressure 

According to its most recent trading update, Glaxo’s sales fell 5% during the third quarter of 2020. However, operating profit increased by 2%. This reflected a significant decline in operating expenses. 

The group’s sales have come under pressure this year due to a decline in vaccine sales. These fell 9% year-on-year in the third quarter due to coronavirus disruption. Visits to vaccination centres declined, and some have closed. 

I think this has to be a temporary headwind. Conditions such as shingles haven’t gone away. Patients are only putting off treatments. When the pandemic has subsided, these clients will return, possibly in greater numbers. 

The same can be said for Glaxo’s pharmaceutical business in general. Sales declined 3% overall in the quarter. The pandemic was also partly to blame. Once again, I think this decline in demand is only likely to be temporary. 

This is why I’m considering adding the GlaxoSmithKline share price to my portfolio after recent declines. Yes, sales have ticked lower this year but, as I said, I reckon the fall is only likely to be a temporary factor. 

At the same time, the firm is investing in new products. This year, Glaxo’s research and development team have progressed several HIV treatments and vaccines. In the last quarter alone, the group received three major regulatory approvals, including asthma and multiple myeloma treatments. 

GlaxoSmithKline share price bargain

Considering all of the above, I’m optimistic about the long-term outlook for the pharmaceutical group. That’s why I’m planning to use the recent decline to snap up a share of this world-leading business. 

Granted, it could be a year or two before the business returns to growth. To some extent, Glaxo’s near-term outlook is tied to the pandemic. The sooner it is over, the sooner vaccination programmes will be able to restart. 

Still, while the company may continue to see disruption in the near term, investors will be paid to wait for its recovery. The GlaxoSmithKline share price currently offers a dividend yield of just under 6%. I think that looks particularly attractive in the current interest rate environment. 

Moreover, shares in the pharmaceutical giant are changing hands at a forward price-to-earnings (P/E) ratio of just 11.6. When looking for cheap stocks, I like to compare the company’s current valuation to its historical average. In this case, the comparison seems favourable. The GlaxoSmithKline share price is trading at a discount to its 10-year P/E ratio of 13.6. 

When considering the company’s long-term growth potential, I think this discount is unwarranted. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Rupert Hargreaves owns no share mentioned. The Motley Fool UK 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.

More on Investing Articles

Ice cube tray filled with ice cubes and three loose ice cubes against dark wood.
Investing Articles

Just released: our 3 top income-focused stocks to buy before April [PREMIUM PICKS]

Our goal here is to highlight some of our past recommendations that we think are of particular interest today, due…

Read more »

Investing Articles

Is this the best chance to buy cheap FTSE 100 shares in a generation?

I want to buy shares when they're cheap, and sell... never, just keep taking the dividends. And the FTSE 100…

Read more »

Man putting his card into an ATM machine while his son sits in a stroller beside him.
Investing Articles

Could NatWest shares be 2024’s number one buy for passive income?

For those of us looking to earn some long-term passive income, how does NatWest's 7% dividend yield sound? It sounds…

Read more »

Investing Articles

£12K in savings? Here’s how I could turn that into £13K annual passive income

This Fool explains how investing a lump sum can help her build a passive income stream to enjoy in her…

Read more »

Aerial shot showing an aircraft shadow flying over an idyllic beach
Investing Articles

Here’s why Rolls-Royce shares are now set to fly over the £4 mark

Once again, Rolls-Royce shares are crushing the FTSE 100. Should I add to my holding of this stock at the…

Read more »

Investing Articles

1 under the radar FTSE 100 AI stock investors should consider buying

Our writer explains why this FTSE 100 pick could be a shrewd investment with its established experience of using AI…

Read more »

Investing Articles

Does the beaten-down Diageo share price make it a no-brainer buy?

Harvey Jones spent years waiting for the Diageo share price to look like good value, before finally buying it in…

Read more »

One English pound placed on a graph to represent an economic down turn
Investing Articles

8%+ yields! Should I buy these FTSE 100 income shares this month?

Christopher Ruane weighs some pros and cons of two FTSE 100 shares, both of which have a dividend yield over…

Read more »