Why GlaxoSmithKline plc is my FTSE 100 stock pick for the next decade

The FTSE 100 (INDEXFTSE:UKX) is still probably the best index for long-term investors, and GlaxoSmithKline plc (LON: GSK) could be its hottest prospect right now.

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.

I reckon all UK stock investment portfolios are best if based on a solid selection of FTSE 100 companies, ideally from several sectors to spread the risk. But I’m occasionally asked which would be my choice if I could only hold one.

In the past I’d have gone for BP or Royal Dutch Shell, bacause energy is never going to go out of fashion and they’ve been dividend cash cows for decades. They’re still great long-term investments, but stubbornly low oil prices knock them off my top spot now.

More recently my favourite has been Lloyds Banking Group, which I’ve held since before the Brexit shock — and though the share price is down, I’m happily taking my growing dividends. But the shambles that Brexit is turning into mean Lloyds could be in for a volatile couple of years.

Today’s favourite

The one that really has been catching my eye lately is GlaxoSmithKline (LSE: GSK). I’ve been following Glaxo for a few years now. That’s ever since earnings growth at the pharmaceuticals giant went into reverse when the firm was hit by the expiry of some key best-selling drugs and by increasing competition from generic alternatives. AstraZeneca suffered similarly and the two have been pursuing a programme of beefing up their drug pipelines.

The corner now seems to have been turned by Glaxo, as the company reported a 35% rise in earnings per share last year. But a slowdown to a forecast of 8% growth this year followed by a 2% shrinkage in 2018 and fears of a dividend cut appear to turned investors away, and the shares have slipped in value to 1,314p.

We’re looking at a forward P/E multiple based on 2017 forecasts of only 12 — and with long-term growth potential, I reckon it deserves a rating in excess of the long-term FTSE 100 average, which stands at around 14.

And Glaxo’s dividend, which has been maintained at 80p per share throughout the downturn, is currently set to yield 6%, which is around twice the FTSE 100 average.

Third quarter

At Q3 time, chief executive Emma Walmsley spoke of “sales growth and improved operating margins,” after new product sales rose by 40% to £1.7bn. I think that’s quite impressive at this stage, after a quarter that saw total sales of £7.8bn, as it’s laying the foundations for profits from the company’s next generation of products.

And we’re seeing a constant stream of development progress, with the company’s new COPD treatment Trelegy Ellipta approved for use in the US and the EU, and its Shingrix shingles vaccine being approved in the US and Canada. A US approval application has also been made for another COPD treatment, mepolizumab, with filings for other markets planned for this year and next.

As for the dividend, I’m optimistic and I see improving cash flow as being able to cover good returns over the long term. But even if there’s a cut, I’d still expect a decent yield to be maintained — and reinvesting the cash should help boost research and growth.

I reckon if you pick Glaxo or AstraZeneca, couple that with BP or Shell, maybe choose a bank if you’re not of a nervous disposition, add a dividend-paying energy firm (National Grid would be my choice) and top it off with an insurer (I hold Aviva), you’d have a very sold core portfolio.

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.

Alan Oscroft owns shares of Aviva and Lloyds Banking Group. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca, BP, Lloyds Banking Group, and Royal Dutch Shell. 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.

More on Investing Articles

Young Caucasian man making doubtful face at camera
Investing Articles

Surprise! This monopoly stock has taken over my Stocks and Shares ISA (again)

Our writer has a (nice) dilemma in his Stocks and Shares ISA portfolio after one incredible growth stock rocketed higher…

Read more »

Investing Articles

10.5% yield – but could the abrdn share price get even cheaper?

Christopher Ruane sees some things to like about the current abrdn share price. But will that be enough to overcome…

Read more »

Investing Articles

£9,000 to invest? These 3 high-yield shares could deliver a £657 annual passive income

The high yields on these dividend shares sail sit well above the FTSE 100 average of 3.6%. Here's why I…

Read more »

Surprised Black girl holding teddy bear toy on Christmas
Investing Articles

I’ve got £2k and I’m on the hunt for cheap shares to buy in December

Harvey Jones finally has some cash in his trading account and is hunting for cheap shares to buy next month.…

Read more »

Investing Articles

Down 25% with a 4.32% yield and P/E of 8.6! Is this my best second income stock or worst?

Harvey Jones bought GSK shares hoping to bag a solid second income stream while nailing down steady share price growth…

Read more »

Investing Articles

Here’s how the Legal & General dividend yield could ultimately hit 15%!

The Legal & General dividend yield is already among the best of any FTSE 100 share. Christopher Ruane explores some…

Read more »

Investing Articles

Is December a good time for me to buy UK shares?

This writer is weighing up which shares to buy for his portfolio next month, and one household name from the…

Read more »

Investing Articles

Is it time to dump my Lloyds shares and never look back?

Harvey Jones was chuffed with his Lloyds shares but recent events have made him rethink his entire decision to go…

Read more »