Is it time to buy GlaxoSmithKline? Well, in the last post I spoke about why I sold Direct Line Insurance – it didn’t fit my investing criteria. One of my key criteria is that a company should have increased its dividend (preferably above the nominal 2% rate of inflation) for at least 7 years. So with the money from this sale, I bought GlaxoSmithKline (LON:GSK), because I felt it was the right time – at long last! But this wasn’t just down to fitting some investment criteria I made up…
Some of you may be surprised that I did not already own this famous pharmaceutical stock, especially since it often forms the core of many a dividend portfolio – but there were good reasons. I’m not a huge fan of the pharma industry, and by that I mean the drug manufacturers, rather than companies like Reckitt Benckiser or Johnson & Johnson who are ancillary healthcare companies. I wrote about morals and investing a while back, but the pharma industry was always less of a problem than tobacco and gambling, because at least they do some good. I do find the whole pharma industry very grey though – some of the stuff they have been getting up to is pretty dodgy to say the least, but then some of the things they do are great:
But that industry is pharmaceuticals, not banks. And on the flip side:
So a mixed bag to say the least. I don’t like the secrecy of data on trials and even worse – pushing of products on hospitals and doctors. I think that it’s more of a health industry problem at large though, not just ‘Bad Pharma‘ (check out the link, a Q & A session with Dr. Ben Goldacre where he discusses the secrecy of data/clinical trials) but ‘Bad Health Industry’ on a widespread scale. Ben discusses GSK’s promise to start sharing data – he gave a date of November 2014 by which he wanted to have seen it happen. Thankfully, GSK were quite quick off the mark, releasing data from May 2013, although this had been in the works for several years, as they already had an internal platform “that allowed researchers to scrutinize data from past clinical trials”. So things have been moving in the right direction as far as I am concerned.
Don’t get me wrong, I’m not some wacko that refuses modern medicines and vaccinations for my kids – if I didn’t have my inhaler I could have died on several occasions over the years, and after having read through the literature on every vaccination scheduled for my son, we did have him vaccinated. The point is that I do try to be informed and not to make judgements that are too simple – I want to know what’s going on – what am I putting into my body and what are the effects going to be? Are there any alternatives which are less damaging, or have less side effects? On some occasions, I would refuse modern medicine (I now usually refuse steroids and usually all antibiotics, but not always), however the point is that I am making an informed decision, not just according to some hardline moral standpoint that I cannot possibly break.
I like to make informed decisions on my investing too, so companies that I feel are a bit morally grey just require more investigation, just as companies that fit my investing criteria need more investigation on the financial side. Rather than throwing the baby out with the bathwater on a questionable company/industry, I like to read up on things a bit first.
On the moral side, GSK seem to be moving in what I consider to be the right direction, but how about on the financial side of things? Well, as mentioned near the top of the post, I generally invest in companies that fit my investing criteria, one criterion of which is 7+ years of dividend growth. GSK have 9 (calendar) years of growth, so they fit that crucial piece of info. However, GSK have announced that they will be holding the dividend at the current level of 80p per year for the next three years… although if there is a boost in profits I guess that dividend can always be increased.
Now, I’m not too bothered by dividends holding steady, although I’d prefer them to always be growing of course. But when you buy high yield shares, you can’t expect them to keep growing the dividend every year. As I mentioned before, high yield shares are for getting your portfolio off the ground, or giving it a boost in yield to propel it along until you start buying more boring medium-yield and maybe even some exciting high growth companies. But the principle I like to stick to when buying any of these types of stocks, is to always buy shares in good value stocks.
I managed to pay £13.61 per share for GSK on 23rd October. The PE ratio (a very simple measure of value, I admit) was under 15 at the time of purchase, and the yield was over 5.5%. Since then, the price has increased by over 3%, but in my opinion still represents pretty good value. I also only paid £1.50 to buy the shares, because it was a regular investment date. This is one of the benefits of certain brokers such as Interactive Investor, AJ Bell (also £1.50), or Halifax Sharebuilder (£2) – you really can afford to invest when you don’t have much money – it’s just a common misconception that you need a lot of money to get started.
I’m not recommending you buy GSK, as I’m not an IFA or other kind of certified financial professional, so as always DYOR. But I would like to know what you think about GSK, the pharma industry in general, or health and wellbeing. And remember, you can easily keep up to date with There’s Value through our monthly newsletter – wahey, no bombarding your inbox with daily or weekly rubbish! You might even get the occasional bonus letter written by M…
Image credit: freedigitalphotos.net/Sira Anamwong