The GSK share price is beating the FTSE 100: should you keep buying?

The GSK share price is beating the FTSE 100: should you keep buying?

Pharma giant GlaxoSmithKline (LSE: GSK) is ahead of the so far this year. The GSK share price is down by a mere 6% or so, compared with a drop of more than 20% for the big-cap index.

Of course, most pharmaceutical stocks have done well during the coronavirus pandemic. Some have performed much better than Glaxo. However, I think that some of these high flyers are starting to look expensive. In my view, Brentford-based GSK now offers much better value than most rivals.

Why is GSK cheaper?
The group’s near-term growth prospects aren’t quite as exciting as those of rival AstraZeneca. Although one-off gains from stockpiling and acquisitions helped to lift GlaxoSmithKline’s sales by 19% during the first quarter, the outlook for full-year earnings is broadly unchanged this year.

By contrast, AstraZeneca expects to report a “mid-to-high teens percentage” increase in adjusted earnings this year.

Investors have chased Astra shares to record levels. But I think the good news is already in the price. I expect Glaxo’s growth rate to improve over the coming years. In my view, this is the better share to be buying today.

Will coronavirus vaccine boost GSK shares?
Many small pharmaceutical stocks have rocketed on hopes that they might discover a coronavirus vaccine. The GSK share price has stayed steady, even though Glaxo is working on a coronavirus vaccine too. But the company isn’t gambling everything on this. Instead, it’s taking a measured approach to creating treatments that could be used to manage the current pandemic and future, similar, viruses.

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Even if Glaxo succeeds, a coronavirus vaccine would be just one product in its portfolio of vaccines, cancer treatments and other medicines. Alongside this, the company also has a strong set of consumer healthcare products, including brands such as Sensodyne and Aquafresh.

The diversity of this business suits me just fine — I don’t want to own all-or-nothing stocks. I want reliable performers that can chuck out growing profits and dividends, year after year. I believe Glaxo fits the bill perfectly.

I think the GSK share price is too cheap
I already own a reasonable chunk of GlaxoSmithKline stock, but I think the stock offers good value at current levels and I’m planning to buy more.

One reason for this is simply that I think the shares are quite reasonably priced. At the time of writing, GSK shares are trading at about 1,670p. This price puts the stock on a forecast price/earnings ratio of less than 15, with a dividend yield of around 4.7%.

That works for me, especially as AstraZeneca is currently trading on 27 times 2020 forecast earnings, with a dividend yield of just 2.6%. In my view, AZN’s stronger growth outlook is not enough to justify such a steep valuation.

Split could lift shares
There’s also a second reason why I’m buying GSK stock. The company is planning to spin out its newly-enlarged consumer healthcare business into a separate listing in 2021. Shareholders will receive shares in the new company.

I’m pretty keen on this. I think the split should create two more efficient businesses with good long-term growth prospects. In my view, both halves of GSK are likely to attract higher valuations as standalone businesses. In the meantime, shareholders get a tasty 4.7% dividend yield. That’s why I’m building up my shareholding before the split.

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The post The GSK share price is beating the FTSE 100: should you keep buying? appeared first on The Motley Fool UK.

Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and 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.

Motley Fool UK 2020

First published on The Motley Fool



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