Is Now the Time to Buy GlaxoSmithKline plc (GSK)?

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LONDON — I’m always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue-chip index. Simply put, I’m hoping to pinpoint the very best buying opportunities in today’s uncertain market.

GlaxoSmithKline plc (ADR) (NYSE:GSK)

Today I am looking at GlaxoSmithKline plc (LSE:GSK) (NYSE:GSK) to determine whether you should consider buying the shares at 1,445 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let’s look at the numbers:

Stock Price 3-yr EPS growth Projected P/E PEG Yield 3-yr dividend growth Dividend cover
GlaxoSmithKline 1,445 pence 110% 12.4 4 5.1% 14% 1.5

The consensus analyst estimate for next year’s earnings per share is 116p (3% growth) and dividend per share is 77p (5% growth).

Firstly, I must say that although GlaxoSmithKline’s three-year earnings-per-share growth is 110%, the company had an extremely bad year in 2010, and this has skewed my figures. I believe over a four-year period, GlaxoSmithKline’s EPS has fallen 7%.

Anyway, trading on a projected P/E of 12.4, GlaxoSmithKline appears cheaper than its peers in the pharmaceutical sector, which are currently trading on an average P/E of around 13.6.

Unfortunately, GlaxoSmithKline’s P/E and low single-digit growth rate give a PEG ratio of around 4, which implies the share price is expensive for the near-term earnings growth the firm is expected to produce.

Offering a 5.1% yield, GlaxoSmithKline’s dividend yield is above the pharmaceutical sector average of 4.8%. Furthermore, GlaxoSmithKline has a three-year compounded dividend growth rate of 14%, implying the yield could continue to outpace that of its peers.

However, the dividend is only one-and-a-half times covered, which does not give GSK much room for further payout growth.

Lastly, GlaxoSmithKline has a strong history of returning cash to shareholders. During 2012 alone, GlaxoSmithKline returned 8.8 billion pounds to shareholders through share buybacks and dividends.

Growth is slow, but should you buy GlaxoSmithKline for its dividend?
Like its close competitor AstraZeneca, GlaxoSmithKline’s earnings are currently coming under pressure due to the loss of patents covering various over-the-counter treatments and falling sales in Europe.

That said, GlaxoSmithKline is still reporting sales growth in emerging markets. In particular, during the last year alone, sales grew 17% in China and emerging market sales now account for 26% of the group’s total sales.

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