GSK: five reasons I’d buy the shares today

GlaxoSmithKline plc (LON: GSK) shares have underperformed the market over the last decade. Don’t let that put you off buying, says Edward Sheldon.

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The performance of GlaxoSmithKline (LSE: GSK) shares has been a little disappointing in recent years. For example, over the last decade, the stock has delivered a total return (share price gains plus dividends) of around 6.4%, which is significantly below the FTSE 100’s total return of 9.1% in that time.

However, if you’re thinking about buying GSK shares, I wouldn’t let this past performance put you off. Here’s a look at five reasons I think Glaxo is a good stock to own today.

Consumer healthcare joint venture

One reason I’m bullish on GSK right now is that back in December, the group announced that it had reached an agreement with Pfizer to combine their consumer health businesses. I see this as a positive development.

The combination will bring together two highly-complementary portfolios of trusted consumer health brands – including GSK’s Sensodyne, Aquafresh and Zovirax, and Pfizer’s Advil, Centrum and Caltrate – which will make it a market leader across pain relief, digestive health, and therapeutic oral health with sales of nearly £10bn and a market share of over 7%.

GSK believes the joint venture will help deliver stronger sales, cash flow, and earnings growth and also generate substantial cost synergies, so that has to be a good thing.

Ageing population

Another reason I see appeal in the stock right now is the long-term growth story associated with the world’s ageing population. As people age, their demand for healthcare products and services tends to increase. As a healthcare specialist that owns an impressive portfolio of trusted consumer healthcare brands such as Panadol, Voltaren, and Fenbid (a painkiller sold in China), the group looks well placed to benefit as the global population continues to age.

Defensive nature

I also like the defensive nature of GlaxoSmithKline shares. Healthcare is less correlated to the economy than other industries (people still spend on health during a downturn) meaning that if we do see a global recession in the near term, GSK shares could outperform. Furthermore, with a globally diversified revenue stream, the stock also offers protection from Brexit uncertainty.

Big dividend

Of course, it’s hard to write an article on GSK without mentioning the dividend as for many investors, the stock’s yield is one of its biggest attractions. Now, I’ll point out that GSK isn’t the ‘perfect’ dividend stock. This is due to the fact that the payout hasn’t risen since 2015, which is a little disappointing. However, the yield of 5.2% is still highly attractive in today’s low-interest-rate environment.

Valuation

Finally, GSK’s valuation seems quite reasonable to me. With analysts expecting GSK to generate earnings per share of 114.5p for FY2019, the shares currently trade on a P/E ratio of just 13.7. I think that’s a fair price to pay for a slice of this global business.

Putting this all together, I see considerable appeal in GlaxoSmithKline shares right now. With a market-leading consumer healthcare joint venture and a durable growth story associated with the world’s ageing population, I believe the stock is an excellent long-term ‘buy.’

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.

Edward Sheldon owns shares in 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.

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