Good News from Glaxo

Focus: Healthcare

James Pearce Image James Pearce Director of Research, Investing Daily

We added GlaxoSmithKline (GSK) to the Income Portfolio last October, a month before Donald Trump’s surprising victory sent share prices of many health services stocks reeling, including Glaxo, recalls Jim Pearce, editor of Investing Daily's Personal Finance.

But our proprietary SHIELD rating system told us that Glaxo wasn’t at risk of cutting its dividend, even if Trump’s constant threats to drastically reduce drug prices ever became law.

Trump’s pro-business approach means governmental pressure on drug prices is highly unlikely to occur. After bottoming out below $38 in December, GSK has been climbing steadily since the election.

Another tailwind for the stock is earnings growth momentum. GSK broke above $42 last month after releasing strong first quarter financial results.

That’s still a far cry from its all-time high share price near $70 achieved 18 years ago, but recent acquisitions are beginning to pay off as evidenced by its most recent quarterly report

During the first three months of this year Glaxo reported a 9% year-over-year improvement in adjusted earnings per share, driven by a 5.4% average increase in sales generated by its pharmaceuticals, vaccines and consumer health care segments.

The company also announced a quarterly dividend of 19 pence (Glaxo is a British company), which equates to an annualized dividend yield of 4.7%.

With the benefit of hindsight we would have waited a month or two before adding GSK to our portfolio. But its quick recovery puts us back into the black on this holding and reaffirms our faith in our SHIELD rating system to identify companies with strong revenue models. GSK remains a buy up to $50.

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