How GlaxoSmithKline plc Fits Into Your Portfolio


Berkshire Hathaway, the investment group of Warren Buffett, has just dumped its $19m stake in GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

The amount was relatively small (for comparison, the group has a $16bn stake in Coca-Cola) and therefore was likely the move of a portfolio manager rather than Buffett himself.

Nonetheless, let’s see if we can assess the strategy behind it.

Why sell Glaxo?

The move represents a wider move away from healthcare stocks for Berkshire Hathaway. Recently the group has sold shares in Paris-based drug maker Sanofi and US pharmaceutical and consumer goods giant Johnson & Johnson.

For context: GlaxoSmithKline is the world’s fifth largest healthcare company and was established in 2000 after the merger of Glaxo Wellcome and SmithKline Beecham. It has a market cap of £81bn and the company’s three primary areas of business are pharmaceuticals, vaccines and consumer healthcare.

It has all the makings of a share that can form the bedrock of any portfolio. It’s defensive, meaning it provides a constant dividend and stable earnings, regardless of market volatility.

Glaxo also slowly appears to be returning to growth, with a rollout of new products set to offset competition from cheap, generic drugs. Last year the drugs maker had five new medicines approved by the FDA, and the pipeline should be further bolstered with reinvested capital from the sales of Lucozade and Ribena for $1.4bn.

The company projects 4% sales growth for 2014 and its scope to innovate is impressive. Based on the size and scale of the company alone Glaxo can afford to fully realise what begin as ideas and turn them in to successful products.

It offers a potential income of 4.5%, which beats the FTSE 100 average, to boot.

Why keep Glaxo?

There is potential for sizeable drug sales in emerging markets, and should current sales trends continue, total sales could eventually match the United States, the world’s largest market, by 2016. The shift in global drug spending is down to rising personal incomes, growing economies and health care reform. A push into emerging markets should pay off down the road for Glaxo.

Late last year the firm offered to spend £629m to increase its stake in its profitable Indian subsidiary to 75%, tapping into growing demand for medicines in the world’s second most populous country. 

We probably shouldn’t read too much into Berkshire’s motives, given the small size of the holding, so there’s no reason for investors to panic. If you thought GlaxoSmithKline looked like a good investment beforehand, stick with your instincts, and filter out any of the surrounding ‘noise’.

Here at The Motley Fool we like companies that have healthy balance sheets, dominant market positions and reliable cash flows. GlaxoSmithKline is one such company.

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> Mark doesn't own shares in any company mentioned. The Motley Fool recommends shares in GlaxoSmithKline.