GlaxoSmithKline: Blue Chip Buy

01/30/2017 10:00 am EST

Focus: STOCKS

Mark Skousen

Editor, Forecasts & Strategies, High-Income Alert

Thanks to our highly bureaucratic FDA, the cost of bringing a new drug to market today is at least $2.5 billion -- and often much more. Fewer than one in 10 medicines that start human clinical trials succeed, notes Mark Skousen, editor of High-Income Alert.

Pharmaceutical companies eat those costs year in and year out. Only one of every 10,000 compounds that enters the pipeline -- and only 16% of those that reach clinical trials -- ever receive government approval.

Even when a firm has a blockbuster patents eventually expire. The average new medicine generates revenue for only about 10 years. That’s a big gamble when you need to recoup billions of dollars of research.

Donald Trump understands how regulation harms both businesses and consumers, discouraging innovation and raising costs. In a recent news conference, he pledged to “cut regulations by 75%, maybe more.”  This is good news indeed for drug companies like GlaxoSmithKline (GSK).

Based in the UK, Glaxo is one of the world’s leading drug companies, with operations in more than 150 countries, a network of 89 manufacturing sites and major research & development centers in Belgium, Britain, China and the United States.

Its pharmaceuticals business develops a broad range of treatments for acute and chronic diseases.  Its vaccines business develops, produces and distributes more than 1.9 million vaccines every day -- or more than 690 million a year.

And its consumer health care business develops and markets products for wellness, oral health, nutrition and skin care, including best-selling brands like Sensodyne, Voltaren, Horlicks and Panadol.

Sales at Glaxo hit $32.8 billion over the last 12 months. And the company boasts plenty of other impressive numbers.

In the most recent quarter, earnings soared 50% on a 23% increase in revenue. Glaxo enjoys a 23% operating margin and it is sitting on $5.8 billion in cash.

I expect Glaxo to earn $2.59 a share this year and more than $3 next year. That means the current dividend yield of 4.8% will not only be maintained but is likely to be significantly increased.

And as the Trump administration makes it easier to bring effective drugs to market, there is plenty of room for share price appreciation here, too.

Glaxo has beaten the consensus earnings estimate in each of the last four quarters. I believe it will again when it reports quarterly results after the market’s close on February 8th. This blue chip drug stock belongs in your portfolio.

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