Stock of the week: GlaxoSmithKline
The defensive nature of the sector and the stock, and the competitive yields paid to investors make GlaxoSmithKline a core holding for many portfolios. In recent years, the large companies in the pharmaceutical sector have suffered because of increased levels of generic competition following patent expirations. Although this company is affected, investors should note that it is less prone to these problems than some of its peers. Interested investors should also appreciate that one of the key attractions of the group over other large pharmaceuticals is the promising pipeline of drugs coming through research and development.
The group’s full year results for 2015 were encouraging as sales rose by 4% to £24bn despite adverse currency movements. Furthermore, sales of new products have been encouraging and are expected to hit £6bn by 2018, which is two years ahead of expectations. The hoped for future improvement should be helped by these new products, diversification (consumer healthcare, biotechnology) and increasing exposure to emerging markets.
This business is very cash generative and is committed to using this towards increasing dividends, share buybacks and bolt-on acquisitions. Moreover, the prospects from the group’s R&D are promising and should be a material driver of organic growth and give us confidence for the medium to longer term. As a result, we recommend GlaxoSmithKline as a ‘buy’ for income seekers willing to accept a lower level of risk.