GlaxoSmithKline Investment Case

Investment Case: GlaxoSmithKline

Herewith a somewhat retrospective look at why I purchased GSK in mid-November 2013.

In future, my intention is to produce investment cases before I buy the shares in question….

So what got me excited?

Fundamentals:

  • ~4.5% dividend yield (rising to ~5% for 2014);
  • Dividend cover 1.52x – not high, and based on adjusted EPS);
  • P/E of 14.5x (FY13 est) vs 17x+ for FTSE100;
  • 2014 P/E estimate: 1.4x.

Business:

  • High margins;
  • Patent-protected products (until they roll off);
  • Non-cyclical;
  • High barriers to entry;
  • Growth from Emerging markets for prescription pharmaceuticals;
  • Large firm capable of delivering pipeline of new drugs (Morningstar rates GSK as having the strongest biotech pipeline (Nov ’13).

Risks:

  • New drugs in pipeline do not transform into profitable products;
  • Modest earnings growth;
  • Further mis-selling scandals e.g. China;
  • Litigation in developed markets.

Investment case:

  • Dividend income with long-term growth potential;
  • Pharma should be in my portfolio;
  • Reasonable value.

Decision:

Good foundation on which to start building the portfolio.

BUY 60 shares at 1,631.45p:

Consideration: £978.87

Commission:   £10

Stamp Duty:    £4.89

Net Cost:         £993.76 (1,656.27p per share)

Photo credit: FreeImages.co.uk

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