With there being a considerable amount of uncertainty present among investors right now, it could prove to be a great opportunity to buy high quality stocks for the long term. Certainly, there is likely to be a considerable degree of volatility in 2016 and prices could come under pressure in the short run, but with strong growth, reasonable valuations and excellent income prospects, the likes of GlaxoSmithKline (LSE: GSK) and Royal Mail (LSE: RMG) both hold huge appeal.
In the case of Royal Mail, the current financial year is expected to be a rather challenging one. Its net profit is expected to fall by 23%, although the market appears to be looking ahead to next year since Royal Mail’s share price has risen by 13% since the turn of the year.
That’s because Royal Mail is forecast to increase its net profit by 9% next year, which is above the wider index’s growth rate. And, with its shares trading on a price to earnings (P/E) ratio of 14.8, this equates to a price to earnings growth (PEG) ratio of just 1.6. As a result, further share price growth could lie ahead – especially since Royal Mail continues to offer excellent income prospects.
For example, it has a yield of 4.5% and, with dividends being covered 1.5 times by profit, there appears to be considerable scope for a sustained increase to shareholder payouts during the medium to long term. With interest rate rises set to be slow and steady, this could bolster Royal Mail’s popularity among investors in 2016 and beyond.
Similarly, GlaxoSmithKline’s appeal as an income stock remains strong. Unlike Royal Mail, though, GlaxoSmithKline is expected to hold dividends steady for the next few years as it seeks to reorganise its business so as to make it increasingly efficient and profitable. Despite this, GlaxoSmithKline still yields around 6% and is therefore one of the best income stocks in the FTSE 100.
Looking ahead, pharmaceutical stocks such as GlaxoSmithKline continue to hold great appeal. That’s at least partly because of the potential for sector consolidation, with a number of major pharmaceutical companies struggling to deliver sustained top-line growth in the wake of pricing pressures from generics. As such, GlaxoSmithKline’s pipeline could be the reason for a possible bid for the business.
Certainly, the closing of a US tax loophole makes this arguably less likely, but even if a bid is not forthcoming GlaxoSmithKline’s pipeline has the potential to push its bottom line higher. And, with it due to rise by 11% next year, it appears to be moving in the right direction – especially as £1bn of cost savings are likely to have a positive impact over the next four years. Furthermore, with a PEG ratio of 1.5, GlaxoSmithKline appears to offer good value for money, which makes now a sound moment to buy a slice of it for the long term.
