Why I’m a Long-Term Investor in GlaxoSmithKline plc (GSK)

LONDON — Back in 2007, I made the first of several purchases that together built up a small stake in GlaxoSmithKline plc (LSE:GSK) (NYSE:GSK) . Then in my early fifties, it seemed a prudent addition to the income-generating portfolio of stocks that I hope will help to secure a comfortable retirement for me.

Nor do I plan on selling the stake. In fact, by the end of this year, I expect my holding in GlaxoSmithKline to be even larger.

In short, I’m a long-term investor in the company and see it as a core part of my retirement strategy.

So let’s briefly review why, and discuss the merits that I see in a holding of GlaxoSmithKline.

Income generation
Priced today at 1,456 pence, GlaxoSmithKline’s shares are on a forecast price-to-earnings ratio of 12, which is around the market’s average. But the forecast yield is decidedly higher — at 5.3%, it’s around 50% more than the market average.

Income growth
Over the last 10 years, GlaxoSmithKline has grown its dividend at a compound rate of 4.9% a year. Now, that’s not “shoot the lights out” territory, but it’s still a decent track record — and one that in more recent times has also been comfortably exceeded. Roll the clock forward and if that growth is maintained, then in a further 10 years’ time my income will be 60% higher than it is today.

Defensive qualities
Better still, that income looks set to be sustainable, thanks to GlaxoSmithKline’s strong showing in both health care and consumer products. Significantly, the company’s dividend held up during the credit crunch and ensuing recession on 2008, when many companies cut their payouts to investors.

Employing around 99,000 people and manufacturing almost 4 billion packs of medicines and health care products every year, the company is also a consumer business with a robust collection of strong brands: Ribena, Horlicks, Lucozade, Aquafresh, Sensodyne, Panadol, Tums, Zovirax — and, of course, the Macleans range of toothpaste, mouthwash, and toothbrushes.

I’m in good company
Rightly or wrongly, I derive a certain comfort from knowing that investors with a far better track record than my own are also solid holders of GlaxoSmithKline shares. Step forward, super-investor Neil Woodford — who has 24% of his funds invested in just three pharmaceutical companies, one of which is GlaxoSmithKline. Indeed, last year he described the sector as being one of the most compelling investment opportunities that he has seen in his career.

Eastern promise
Finally, I like shares with an emerging-market dimension, as that is where GDP growth — and, hopefully, profit growth — is highest. And GlaxoSmithKline has made its commitment to emerging markets very explicit, with an avowed strategy of reducing its reliance on “white pill, Western markets.” Better still, it’s put its money where its mouth is, buying or enlarging its stakes in business as far flung as India and Nigeria.