Is GlaxoSmithKline The Ultimate Retirement Share?

Published in Company Comment on 10 August 2012

Will shares in GlaxoSmithKline help you build a FTSE-beating retirement fund?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), the UK's largest pharmaceutical company.

Performance enhancing drugs

GlaxoSmithKline's product range includes consumer brands such as Lucozade, Sensodyne and Nicorette, as well as its prescription drugs and vaccines. It's a classic defensive stock and has been far less volatile than the FTSE 100 over the last 5 years:

Total Return20072008200920102011Trailing 10 yr avg.
GlaxoSmithKline-1.0%4.8%7.4%-1.2%24.2%4.0%
FTSE 1007.4%-28.3%27.3%12.6%-2.2%6.9%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

Although GSK's trailing 10 year average total return is below that of the FTSE 100, anyone holding GSK shares from 2007 until today would have seen a total return, including reinvested dividends, of 40%, compared to 12% for the FTSE 100 total return index.

What's The Score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how GlaxoSmithKline shapes up:

ItemValue
Year founded2000*
Market cap£74bn
Net debt£9.2bn
Dividend Yield4.7%
5 year average financials
Operating margin28.7%
Interest cover13.7x
EPS growth33.8%
Dividend growth7.8%
Dividend cover1.7x

*GSK was the result of a series of mergers, the final one of which took place in 2000. The component companies are much older.

Source: Morningstar, Digital Look, GlaxoSmithKline

Here's how I've scored GlaxoSmithKline on each of these criteria:

CriteriaCommentScore
LongevityA new company, but a long history with some major brands.4/5
Performance vs. FTSEA strong, defensive performer.4/5
Financial strengthQuite heavily geared but high profit margins and ample cash.4/5
EPS growthInconsistent, but likely to be steady over the long term.3/5
Dividend growthAbove-inflation and stable dividend growth -- ideal for retirees.4/5

Total: 19/25

A score of 19/25 is attractive in my view and makes GlaxoSmithKline and attractive candidate for a retirement fund portfolio -- indeed, I hold these shares in my own retirement fund.

Expert pick

I'm not the only investor who rates GlaxoSmithKline for its long-term prospects. Far more accomplished investors than me have invested heavily in GSK shares, including Neil Woodford, one of the most successful fund managers in the City. Neil Woodford's dividend stock picks have outperformed the wider index by a staggering 305% over the last 15 years and he currently looks after £20bn of private investors' money -- more than any other City manager.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

This report is completely free and I strongly recommend you download"8 Shares Held By Britain's Super Investor" today, as it is available for a limited time only.

Warren Buffett buys British! The legendary investor has recently topped up on his favourite UK blue chip. Discover what he bought -- and the price he paid -- within our latest free report!

Further investment opportunities:

> Roland owns shares in GlaxoSmithKline.

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

goodlifer 10 Aug 2012 , 11:19am

Yet another plug for the Blessed, boring Neil.

If our experts really mean what they say, why don't they entrust Him with their money and get on with their own silly little lives while we get on with ours?

I'm reaching the stage where I don't bother to read the articles any more - I just look at the comments offered by you fellow-Foolish foot-soldiers.
They're generally interesting, often helpful, sometimes very helpful indeed.

What do other Fools think?

apprenticeDRL 10 Aug 2012 , 11:47am

I think you may not be the only one. I have noted a significant drop in the number of comments posted recently though.

vinchainsaw 10 Aug 2012 , 12:11pm

It is bordering on the ridiculous.

Some of the articles seem to be getting a rather spam feeling to them, ie they're really only there so the sales pitch can be included at the bottom.

I find it quite sad really. If the products are so good, do they really need this level of sales pitching?

absolver 10 Aug 2012 , 12:11pm

I agree. I generally skip the last two or three paragraphs of most articles - and hope I'm missing nothing important.

I appreciate TMF needs income (I assume Buffet and Woodford are paying something for these adverts) but they are certainly in danger of losing me as a reader.

jackdaww 10 Aug 2012 , 12:21pm

agreed.

i normally go straight to the comments - some of the posters are excellent - and many have useful info to impart.

jackdaww 10 Aug 2012 , 12:25pm

absolver.

i very much doubt if buffet and woodford are aware of fools existence let alone get paid.

its certainly about money - maybe its the number of hits on the web site bringing attention to advertisers.

anyone out ther know how it works ??

atalbot9 10 Aug 2012 , 12:42pm

The reports are free - it's all about getting email addresses for a targeted, probably quite wealthy, audience. Financial services firms will pay a lot of money for our eyeball time so TMF emails contain a lot of adverts, maybe sponsored articles etc etc, maybe they sell our details direct to firms too (probably not).

It's how many publishers are making money these days and after all they are businesses and have costs to pay so 100% understandable. However the constant plugging after EVERY article is tiresome and they do risk losing their audience. They need some way of having these sections at the end for newbs but not for the rest; i.e. if you sign in you don't get the plugging (you already have out details!).

Otherwise content is quite good, although I'm starting to find it all a bit repetitive, yes we like dividends, yes we like well run companies, yes these companies look cheap, etc. Not really sure of new content ideas, only so much you can say I guess!

dejw 10 Aug 2012 , 12:49pm
dejw 10 Aug 2012 , 12:54pm

First of all I support what has been said about the Sainted NW.

Second, the chaps in control of MF should take note. I've always regarded MF articles as sane, independent and thought provoking. (but not always correct, who remembers the pazzaz around "beat the Ftse" in the 1990s?) SO, bosses of MF, you are in danger of losing all crediblity in your brand if you go on like this. Please stop it.

I challenge the MF editorial board to make a statement on this really sad state of affairs.

DejW

Excel35 10 Aug 2012 , 1:07pm

The constant referring to Woodford and Buffet is ludicrous, especially Buffet as he doesn't own hardly any Uk stocks.

The fool know about our views on Woodford etc but don't give a damn.

I too only read this article because of the comments number as the posters comments are often more useful than the article.

ANuvver 10 Aug 2012 , 1:34pm

There's also the search engine optimisation issue that is gradually stripping flavour out of online news. The ad industry is desperately trying to develop ways of parsing content for useful info at the same time as the content producers are distorting what they put up to try to attract them. Where she stops, nobody knows...

As to GSK, happy holder here. But I don't think I'll be buying anything with the 100 challenging 5,9. Value very hard to find at the mo.

I've always found it amusing that in the most avaricious, driven enterprise on the planet, everyone sort of clocks off for their summer hols!

JustWannaBuy 10 Aug 2012 , 4:14pm

Ditto above, sick of the constant ref to Woodford and Buffett....

alsirat 10 Aug 2012 , 6:33pm

Ditto from me as well. I wish they would stop doing it. I don't even read the last three paragraphs assuming they contain the usual repetitive garbage. I can't help noticing that no-one from TMF has responded to the comments.

giveaholic 10 Aug 2012 , 7:37pm

Ditto to all the Buffett Woodford blog-junk.

mrburns2050 10 Aug 2012 , 9:44pm

only been reading for about a year. Have a detailed look most nights. I too really enjoy the comment and other peoples points of view.

But in the past few months i too have been skipping to see how many blue links then not even bothering to read if it looks just like a plug.

Your ruining a good thing!!!

jaizan 10 Aug 2012 , 10:10pm

Most of the time, the article just acts as a catalyst to bring out some good comments from members.

However, things are getting over repetitive.

As for the scoring in the original article, how can a business facing patent expiries get 4 out of 5 for longevity ?

forsunnydays 11 Aug 2012 , 2:11am

I concur with all the above and have made similar comments several times before about the constant Buffet/ Woodford plugs. TMF- Can't you see that your readers have had enough of it and it is now detrimental to your business??

I also wonder if any of the authors would be brave enough to write a negative article about a management team?

As for GSK (after all that is what we should be commenting about), I would happily hold it in my portfolio. But, at the moment, it is looking a bit pricy- sub- 1370p would be a very tempting entry point.

Keep smiling,

forsunnydays

Spritehawk 11 Aug 2012 , 9:37am

Seeing as this has turned into some kind of poll, I'm throwing my hat into the ring, too. Totally fed up with the constant, repetitive inserts trying to get us to click on links for free reports.

geeWCee 11 Aug 2012 , 12:47pm

I'm another that now skips the main bulk of the articles straight to the comments. I'm just hoping that the crappy advert ridden articles dont scare away the guys who take the time to make useful comments on here. Where would MF be without them??

Curvedair 11 Aug 2012 , 4:39pm

I agree wholeheartedly with the views above. The insightful comments are pretty much the only reason to look at MF nowadays.

Badgerd 13 Aug 2012 , 2:36pm

It wouldn't be so bad if we heard something NEW about WB/NW for a change …

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