As a long-term investor, I’m interested in the total return my investments can provide. I want those returns to exceed the market and what I could achieve if I just invested passively in an index tracker fund. This is why I want to find high-growth smaller-caps, alongside FTSE 100 companies that can provide good income and growth.
FTSE 100 company with improvement potential
GlaxoSmithKline (LSE: GSK) is a pharmaceuticals giant held by a lot of private and institutional investors. Its share price has been floundering, but there are catalysts for a re-rating on the horizon.
The planned spin-out of its consumer business is the most obvious. The focus then on research and development (R&D) will put it on a potentially similar path to AstraZeneca, which has far outperformed GSK in recent years in terms of share price growth.
Another would be acquisitions. GSK has already bought Tesaro to boost its oncology portfolio. Given the amount of catching up GSK needs to do, further acquisitions could boost the shares, provided they are strategic and reasonably priced.
There’s some doubt over the dividend in the short term and it has been held flat for a few years. However, the discovery of blockbuster drugs (through internal R&D and acquisitions) could lead to dividend growth in the future.
What are the potential downsides and reasons it might not multibag? One issue, of course, is that drugs don’t make it through trials. Another potential downside is that earnings suffer without the diversification of income that GSK currently has. That could put pressure on both the dividend and the share price, hitting shareholders with a double whammy.
But I feel the GSK share price could be good value after its recent decline and I might add it to my portfolio for both income and growth.
The Covid recovery share
Diageo (LSE: DGE) is a share that I already hold. I think the beverages group should bounce back strongly once lockdowns are completely lifted. That’s because it owns brands such as Johnnie Walker, Smirnoff and Guinness and a whole lot of other well-known alcoholic beverage names.
When its trade customers — such as pubs, restaurants, and clubs — open again, there will be an immediate boost to earnings that has been missing for at least part of the last year.
And its shares are up 60%+ over the last five years, even with the drop caused by Covid. To me that shows it can produce steady share price growth.
The risks with this share are its valuation and the possibility of further Covid setbacks. Taking each in turn, the P/E is about 27, which is on the high side. But I’m happy to hold for the long term and think past performance could be replicated in the future as more people around the world enjoy drinks with strong brand names.
I’d like to see the share price rebound as the economy reopens here in the UK and across other important markets (in Europe for example). However, new variations of Covid could delay that and hit Diageo’s share price.
Overall though, I’m positive about Diageo and will keep it in my portfolio.
Andy Ross owns shares in Diageo and AstraZeneca. The Motley Fool UK has recommended Diageo and 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.