After a stunning 2013, many UK investors have been surprised at the 1% gains made by the FTSE 100 so far in 2014. However, even that compares very favourably to the performance of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) year-to-date, with the pharmaceutical company seeing its share price fall by 10% since the turn of the year. However, this presents a golden opportunity to buy a slice of a great company at a great price.
The main cause of GlaxoSmithKlines share price demise in 2014 has been allegations of bribery. These were first centred around China and went back over a decade. However, more recent allegations concerning the role of the company in Syria have now emerged, which seems to have further weakened investor sentiment towards the company.
Weak sentiment means that shares in GlaxoSmithKline now trade at a hugely attractive price. On the face of it, though, they appear to be rather fully valued. Thats because they trade at a premium to the wider market, with the FTSE 100 having a price to earnings (P/E) ratio of 13.8 and GlaxoSmithKlines P/E being 15.1.
However, when compared to many of its sector peers, GlaxoSmithKline appears to scream value. For example, AstraZeneca trades on a P/E of 17.3 and Shire had a P/E ratio above 20 when it was approached by US rival, Abbvie. Therefore, GlaxoSmithKline does appear to offer scope for a significant upward revision to its current rating.
At present, GlaxoSmithKline yields a hugely impressive 5.6%. That makes it one of the highest yielding stocks on the FTSE 100 and, in addition, it has a track record of reliable dividend growth. In the last four years, for example, dividends per share have increased each year and, perhaps more importantly, they are forecast to continue this trend next year. Dividends per share are all set to increase by 4.1% next year, which means that GlaxoSmithKline could be yielding as much as 5.9% in 2015.
A Superb Pipeline
In the long run, pharmaceutical companies depend on their ability to replace blockbuster drugs that go off patent. On this front, GlaxoSmithKline excels. It has a highly diversified and impressive pipeline of potential new drugs and, this time last year, the market was excited about the companys long term pipeline potential. Today, even though it looks as strong as ever, the focus has switched away from GlaxoSmithKlines pipeline and onto the bribery allegations.
This doesnt mean that GlaxoSmithKline has a future that is less bright. What it does mean, however, is that there is an opportunity to buy a high-yielding company with an exciting pipeline at a great price. For these three reasons, GlaxoSmithKline looks like a steal.
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Peter Stephens owns shares of GlaxoSmithKline and AstraZeneca. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.