Thursday, 17 July 2014

BUY: GlaxoSmithKline--Making Hay?

Price: 1564.9 and 1539.95
Shares: 72
Projected annual dividend income: £57.60 (this purchase) and £97.60 (entire holding)

The healthcare giant GSK is still finding itself under pressure from the Chinese government currently. Bribery claims appear to be building up and certainly not going away. Indeed, today they confirmed that bribery allegations in China from a decade ago were indeed true.

As a result, GSKs share price has continued to slowly drop about 3% since I first put money into the company earlier this month.

Why did I put more in? Well, quite simply because the company still remains in excellent condition despite the various allegations. A strong drug pipeline, excellent new opportunities brokered by the Novartis deal, and strong EPS and dividend forecasts over the long term.

Now I am developing a more intense dividend focus GSK is stunning.

The dividend forecasts have dropped a little for the next two years since I first purchased GSK stock. However, the small changes still leave the forecast at a 5.21% and then 5.37% yield for this year and next. Not bad at all.

What is more, with the growing holding in GSK I am now placed to bring in new shares through dividend reinvestment (with my original purchase I fell below the value likely to bring in a new share each quarter). This is excellent news for enhancing the compound growth of my holding.

What is more, the company looks superb value.

EPS predictions have dropped down a little bit as well since my first purchase. Despite this, the forward P/E ratio's look even better currently. For 2014 we find this:

EPSP/E Ratio
Difference (%)18.47

You will note that all have dropped a bit. However, the price has dropped further still leaving us with a better P/E ratio.
For 2015 the same occurs with a lowering set of predictions but improving P/E ratio:

EPSP/E Ratio
Difference (%)23.78

Similarly,  the low volatility of the stock will be welcomed in my portfolio.

The continued low Beta of GSK of 0.4811 is also appealing. As I noted in my interim review of my portfolio earlier this month I am looking to reduce over time the volatility of my portfolio. This GSK will do grandly.

Am I worried about anything? Yes, a little. Of course, the Chinese allegations are a cause for concern as are the sharp sales drops in the country recently as a result of these. Even if China is still only a small market for GSK currently it represents an important growth one in the future.

Nonetheless, GSKs attempts to improve it image by strong moves to clean up its act beyond the specific allegations are encouraging and hopefully fruitful--not just in China.

Dividend cover is still a little slight.

In reality, the dividend cover of about 1.3 for this year and 1.36 for next year is a little slight for my liking. But GSKs cash flow is still impressive and covers this well. What is more, I expect this to improve over time as the new drugs come onto the market and the economy improves.

GSK is now by far my biggest holding.

Also, since the series of purchases I now find that GSK represents the largest holding in my portfolio--displacing Unilever. This does not worry me unduly as GSKs progressive dividend policy means it certainly deserves a significant place in my portfolio. It will, of course, play a prominent role in my dividend income record.

Ultimately, it would of eventually formed part of my portfolio as time passed, so I am glad to get my fill when it is good value.

[Creative Commons image reproduced from Flickr user Ian Wilson (foolstopzanet)]

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