When faced with a choice between growth and income, what should you do? In the case of GlaxoSmithKline (LSE: GSK) and Indivior (LSE: INDV), the best answer might be to buy both.
GlaxoSmithKlines appeal as a long-term income stock is no secret. Although the firms dividend-paying ability has been stretched over the last couple of years, the situation appears to be improving.
The companys efforts to reduce debt and restructure its portfolio appear to be paying off. Recent first-quarter results showed an 8% rise in core profits compared to the same period last year. Glaxo was sufficiently confident in its full-year outlook to firm up its forecast for 2016. Core earnings are now expected to be 10-12% higher, on a constant exchange rate basis.
City analysts are convinced, for now at least. Earnings forecasts for the current year have been increased by 4.4% since January, while those for 2017 have also been notched higher.
Glaxos big appeal is its combination of a chunky dividend and the potential for long-term growth, as global pharmaceutical sales rise. The companys guidance is for a dividend of 80p both this year and next. While this lack of growth hints that the firms payout may still be too generous, the forecast yield of 5.5% is very attractive. In my view a cut is relatively unlikely.
This stock could double
Glaxo may be an attractive income stock, but the firms 70bn market cap means that rapid capital gains are unlikely. Glaxos share price has risen by 24% over the last six years, almost exactly in line with the FTSE 100.
Investors looking for big gains may have to take a little more risk. One possibility is Indivior.
On the face of it, Reckitt Benckisers decision to spin off its pharma business into Indivior looks increasingly wise. Indiviors profits are crumbling as the firm faces a rising tide of generic competition for its sole commercial product, Suboxone. Post-tax profits fell by 42% last year, despite sales only falling by 6%.
A decline on this scale isnt sustainable, and if generic alternatives to the firms flagship Suboxone Film variant are approved, the situation could get much worse. Although Indivior does have some new products in its pipeline, commercialisation is still some distance away.
Why consider investing?
One key attraction is that Indivior has a fairly strong balance sheet. The firm had a cash balance of $543m at the end of the first quarter, with net debt of $83m. Indiviors debt isnt due for renewal until 2020.
In my opinion, Indiviors management will be hoping to use its cash balance to help fund an acquisition or merger deal that will broaden the companys portfolio. Another possibility is that Indivior will be acquired.
In any case, I expect the firm to attempt some kind of transformative transaction over the next couple of years. If successful, this could give the firm a much stronger long-term outlook. The current share price of 172p giving a 2016 forecast P/E of 10 may end up looking very cheap.
The risk is that Indiviors management wont pull off this trick. If this happens then profits and the share price could decline indefinitely.
By pairing Indivior with GlaxoSmithKline, you may be able to enjoy an attractive mixture of income and growth.
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Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.