Are GlaxoSmithKline plc & National Grid plc The Only Shares You Need To Own?

Roland Head asks whether National Grid plc (LON:NG) and GlaxoSmithKline plc (LON:GSK) have market-beating potential.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Is it possible to run a successful portfolio with just two shares? I wouldn’t recommend it, but if I decided to try, National Grid (LSE: NG) and GlaxoSmithKline (LSE: GSK) would probably be on my shortlist of stocks to consider.

Both companies appear to offer a combination of reliable long-term growth and generous dividend yields. Both firms are also very large. Together, National Grid and Glaxo account for 5.7% of the FTSE 100’s total market capitalisation. This makes them less likely than smaller companies to fail, although long periods of underperformance are still possible.

Not likely to underperform?

Indeed, many investors believe that GlaxoSmithKline has been underperforming over the last few years. Although the dividend has been maintained, the firm’s shares are currently trading 15% below their July 2013 high of 1,745p.

Should you invest £1,000 in National Grid right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if National Grid made the list?

See the 6 stocks

However, things now seem likely to change. Glaxo completed a major asset swap deal with Swiss firm Novartis last year. The firm’s sales rose by 4% and while profits were lower, a number of new products made a strong contribution for the first time.

I believe Glaxo’s restructuring has positioned it to deliver a sustained period of growth. Adjusted earnings per share are expected to rise to 85.3p this year, covering the firm’s forecast dividend of 81.9p per share for the first time in three years.

There’s also one more big change in the pipeline. The group’s chief executive, Sir Andrew Witty, is expected to leave next year. If GlaxoSmithKline shares continue to underperform the market, I suspect its next chief executive will come under pressured to break up the group.

Fund managers such as Neil Woodford hold the view that Glaxo would be worth more as two or three companies than it is as one. I suspect he’s right, although I like the defensive nature of Glaxo’s diverse portfolio.

In the meantime, I believe GlaxoSmithKline’s 5.5% dividend yield and long-term growth potential make the shares a strong buy.

Heading in the opposite direction?

While GlaxoSmithKline may have underperformed the market, National Grid hasn’t.

Over the last five years, shares in National Grid have risen by 69%, compared to just 3% for the FTSE 100. The two other large listed power utilities in the UK, SSE and Centrica, have also lagged National Grid. Centrica has fallen by nearly 30% over the same period, while SSE has gained just 17%.

National Grid also has a couple of other attractive features. The firm’s US utility business helps diversify the group’s operations and reduce its dependency on the UK market. Another attraction is that unlike electricity generators like SSE and Centrica, National Grid’s direct exposure to coal, oil and gas prices is very low.

I can’t see any reason why National Grid’s business can’t continue to perform strongly. My only reservation is that the shares are no longer obviously cheap. Dividend growth has now slowed to just 1% to 2% a year. And National Grid’s 4.3% yield is well below the 6% on offer from SSE.

However, analysts have a positive outlook for the next couple of years. Forecast earnings for 2015/16 have risen by 5.5% over the last year. There’s a real possibility that National Grid will continue to outperform its utility peers.

Investing in AI: 3 Stocks with Huge Potential!

🤖 Are you fascinated by the potential of AI? 🤖

Imagine investing in cutting-edge technology just once, then watching as it evolves and grows, transforming industries and potentially even yielding substantial returns.

If the idea of being part of the AI revolution excites you, along with the prospect of significant potential gains on your initial investment…

Then you won't want to miss this special report inside Motley Fool Share Advisor – 'AI Front Runners: 3 Surprising Stocks Riding The AI Wave’!

And today, we're giving you exclusive access to ONE of these top AI stock picks, absolutely free!

Get your free AI stock pick

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of GlaxoSmithKline and SSE. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Prediction: 12 months from now, £5,000 invested in Tesla stock could be worth…

Tesla stock has endured a miserable year so far, falling by 29%. Muhammad Cheema takes a look at how it…

Read more »

Investing Articles

See what £10,000 invested in Tesla shares at their mid-December peak is worth today 

As the world absorbs the full scale of Donald Trump's tariffs, Tesla shares are reeling. Investors who bought the stock…

Read more »

Hand flipping wooden cubes for change wording" Panic " to " Calm".
Dividend Shares

2 ‘safe’ LSE dividend stocks to consider as global markets sell off

As global markets experience high levels of volatility due to economic uncertainty, investors are piling into these ‘safe-haven’ dividend stocks.

Read more »

Investing Articles

US stock market rout: an unmissable opportunity for investors?

His tech-heavy portfolio has been smashed by Trump’s tariffs. However, Dr James Fox believes there could be some opportunities in…

Read more »

Investing Articles

After a 13% ‘Trump tariff’ fall, is the Barclays share price too cheap to miss?

Does the Barclays share price fall mean we should all panic and run screaming from the stock market? Nah, of…

Read more »

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Investing Articles

2 investment trusts to consider for a Stocks and Shares ISA

These two investment trusts have a different focus -- but our writer sees both as worth considering, one more for…

Read more »

Investing Articles

Deutsche Bank reiterates Buy rating on 9.6% yielding FTSE 250 stock that was “most shorted in UK”

Our writer investigates why a major broker remains optimistic about a FTSE 250 stock that was once the most shorted…

Read more »

Investing Articles

2 things to remember when stock markets are turbulent

US trade policy has rattled the stock markets in New York, London and elsewhere. Our writer outlines a couple of…

Read more »