GlaxoSmithKline - Too popular for value investors?

GlaxoSmithkline (LON:GSK) is a popular stock.  It’s often among the most traded stocks in any given day and it’s a favourite of Neil Woodford, the current Master of the Fund Management Universe.  Not only is it one of Woodford’s top holdings, but according to the Citywire web site, it’s a top five holding for four out of their five ‘top fund managers’. 

This level of popularity is interesting; not because I like popular stocks but quite the opposite – as a value investor I’m more used to backing companies like which are having a hard time of it in the press, or at least in the minds of other investors.  With Glaxo I find instead a company that is both popular and which also seems to be attractively valued.

Dividends are king… for now

The stock’s popularity probably has more to do with the current investment environment than anything else.  Dividends are king at the moment precisely because this sideways market means there is little capital gains to cheer about.

And yet despite this current popularity for dividend stocks there just isn’t enough interest in equities in general to push the market up, so quality companies remain both popular and cheap.

What’s to like?

Quite a lot I think.  In terms of safety, the company is a huge international firm operating in the defensive industry of healthcare.  It is one of the world’s largest pharmaceutical companies and has been consistently profitable for a very long time. 

Revenues, earnings and dividends tend to increase in most years and in the last decade the earnings per share growth rate has been above inflation, as has the dividend which is currently yielding around 5%.

 Special Offer: Invest like Buffett, Slater and Greenblatt. Click here for details »

The shares are priced at just under 15 times the average earnings of the last decade.  While this isn’t exactly super-cheap, it’s a fair price and when combined with inflation beating growth and a 5% yield, it’s obvious why many fund managers and private investors love this stock.

Is it a screaming buy?

I would be quite happy to hold Glaxo in my portfolio.  However, that’s not quite the same as saying I would rush out and buy it.  Of the 200 or so FTSE 350 stocks which I filter and rank each month, GlaxoSmithKline is in 49th place.  In comparison, the FTSE 100 (which is ranked as if it were a single super-conglomerate) comes in at position 72.  You can see the comparison below:

So it passes the first test, which is that it may be better value than the market index.  In my book any equity investment must be compared to the market index because if it doesn’t appear to offer better value than the index why would an investor want to take the additional risk inherent in an individual company?

But it only beats the index by a small margin, mostly thanks to the healthy yield. 

In summary then I’d say it’s a great company at an attractive price, but that attraction may be stronger for pure income investors rather than those seeking maximum total returns from a combination of income and growth.