04 Jan Should I swap GlaxoSmithKline plc for this turnaround stock?
The last few years have been challenging for investors in healthcare company GlaxoSmithKline (LSE: GSK). The stock has seen its share price decline by 15% in the last year, while its financial performance has suffered significantly. In fact, its bottom line declined in four consecutive years from 2012-15, while dividends have failed to rise since 2013.
Therefore, could now be the right time to sell the stock? And could this turnaround play be a better option for the long term?
While GlaxoSmithKline has endured a difficult period during the last five years, its future prospects appear to be relatively bright from an investment perspective. The healthcare industry continues to have significant advantages for investors. Notably, the world’s population is growing and ageing. This could mean that demand for a range of healthcare products increases, which could provide a tailwind for industry operators. Furthermore, with the healthcare sector being less positively correlated to the performance of the wider economy than most industries, it offers defensive characteristics.
As mentioned, the stock’s performance in the last year has been disappointing. However, this means that it now trades on what appears to be a very low valuation. Its price-to-earnings (P/E) ratio is just 12, which for a FTSE 100 healthcare stock is relatively low. An upward re-rating could easily be justified – especially because a rise in earnings of 8% is due to be reported for the 2017 financial year.
In addition, a 6% dividend yield continues to have appeal to a wide range of investors. Although dividend growth may not restart in 2018, shareholder payouts are expected to be covered 1.3 times by profit this year. Alongside earnings growth, this could mean that dividend growth may return over the medium term. This could provide an additional catalyst for the company’s investors.
Also offering the potential for improved share price performance after a difficult year is fellow healthcare stock Vectura (LSE: VEC). The device and formulation business for inhaled airways products reported on Thursday that its revenue for 2017 is expected to be in line with previous expectations.
It continues to have the capacity to invest heavily in R&D, with expenditure for 2017 expected to be between £60m and £70m. A strong performance in the second half of the year led to a healthy closing cash balance of £104m, which suggests further investment in its future growth capabilities could be ahead.
With Vectura forecast to post a rise in its bottom line of 24% in the current year, it could deliver a successful turnaround following a fall in its share price of 15% in the last year. The company’s shares now trade on a price-to-earnings growth (PEG) ratio of just 1.5, which indicates that they may offer good value for money. As such, now could be the perfect time to buy them, although selling GlaxoSmithKline to do so does not appear to be a good idea given its low valuation, high dividend yield and improving outlook.
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Peter Stephens owns shares in GlaxoSmithKline and Vectura. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.