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GSK share price: 3 reasons I’d buy this FTSE 100 stock today

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GlaxoSmithKline (LSE: GSK), the pharmaceuticals, vaccines and consumer health giant, is a FTSE 100 stock that looks very buyable to me right now. A year ago, the GSK share price hit a high of £18.50. Today, I can buy the shares for £14 — a 24% discount.

Here, I’ll discuss three reasons why I think GSK is attractive at this level. I’ll also look at the potential risks to the investment case.

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Return to revenue growth

It’s hard for a company to increase its profit, if its revenue isn’t rising or is actually falling. There’s a limit to how far costs can be cut to offset a weak top line. Following a long period in the doldrums, GSK has returned to revenue growth.

When it issues its 2020 results next Wednesday, City analysts expect to see a 1.1% uptick in revenue to £34.1bn. And they expect it to break through £40bn by 2024, giving a four-year compound annual growth rate of 4.1%.

The return to revenue growth is one reason why I think the GSK share price is attractive. The rising top line should lift profits higher at a decent clip. As such, a rating of 12 times the 2020 profit expected to be reported next week looks cheap to me.

There’s still a risk the medium-term analyst consensus could prove over-optimistic. However, I think the lowly rating of 12 times profit provides some margin of safety.

Yield at today’s GSK share price

In October, the company said: “The board currently intends to maintain the dividend for 2020 at the current level of 80p per share.” On this basis, GSK’s dividend yield is 5.7%. This generous yield is another reason why I think the GSK share price is attractive.

Not that GSK will be raising its dividend any time soon. The company advised us not to expect an increase in the dividend in the near term. It said: “Over time, as free cash flow strengthens, it intends to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x, before returning the dividend to growth.”

City analysts are forecasting free cash flow cover will reach this range in 2022. And they expect a first dividend increase in 2023.

However, these forecasts flow from the projections of revenue growth. If the top-line progress proves weaker than expected, the anticipated dividend increase may not materialise. This is a risk I can tolerate, with the yield running at 5.7%.

The GSK share price and break-up value

The aforementioned forecasts are based on the company as it is. However, GSK is planning to demerge its consumer healthcare business in 2022. This kind of break-up often realises value for shareholders, with the market rating the businesses more highly as separate entities than when they were yoked together.

The analysts’ estimates I’ve seen of GSK’s ‘break-up value’ equate to a share price in the region of £18-£20. This implies there could be potential upside of as much as 43% for buyers of the stock today. This is the third reason why I think the GSK share price is attractive.

It’s possible — but I think unlikely — that the company will do a U-turn on the separation of the consumer healthcare business. It’s also possible the demerger doesn’t crystallise the break-up value analysts currently envisage.

However, all in all, GSK’s risk/reward balance at the current share price appeals to me.

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G A Chester has no position in any of the shares 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.

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