The FTSE 100 contains some of the largest companies in the world. As such, there’s a limited number of companies in the index that have the potential to double investors’ money.
Legendary investor Jim Slater even coined a phrase to demonstrate this idea. His famous statement that “elephants don’t gallop” illustrates the view that big corporations rarely double in size, but small ones can.
However, GlaxoSmithKline (LSE: GSK) could be the exception to this rule.
Income and growth
Glaxo has embraced its position as one of the world’s largest pharmaceutical groups over the past few years. The company has doubled down on its research and development spending while selling off or closing down non-core divisions or research initiatives.
The results of this strategy are already starting to show through. City analysts are forecasting a 35% increase in earnings per share this year, on the back of improving revenue growth.
Over the next few years, we should see this trend continue as new treatments flow through the company’s pipeline and make it to market.
At the same time, management has promised to pursue the spin-off of Glaxo’s healthcare business. At the end of 2018, the company reached a landmark agreement with US pharmaceutical giant Pfizer, to combine the two businesses’ consumer health divisions. The deal was closed in August 2019, creating the world’s largest over-the-counter (OTC) business with robust iconic brands.
Analysts have long claimed that the market is undervaluing this part of the business. As such, the City believes that investors could be set for a big payoff when Glaxo splits off this division.
Capital growth potential
Glaxo’s break-up offers capital growth potential. The stock also comes with a dividend yield of 4.5% at the time of writing. The payout is covered 1.5 times by earnings per share, suggesting that it is sustainable for the foreseeable future and could rise substantially from current levels.
Also, shares in the pharmaceutical giant are currently dealing at a price-to-earnings (P/E) ratio of just 14.6. This indicates that the stock offers a wide margin of safety. The rest of the UK pharmaceutical sector is trading at a P/E ratio of more than 17.
Double your money
Glaxo’s dividend yield, coupled with the company’s low valuation and its growth potential over the next few years, signifies that the stock could double investors’ money over the next 10 years.
A dividend yield of 4.5% as well as earnings growth of around 3% per annum — in line with inflation — suggests that shares in Glaxo could yield a return of 7.5% per annum for investors, doubling an investment of £1,000 in 10 years. That’s without taking into account any increase in the company’s valuation or an increase in value from a spin-off of the Pfizer joint venture.
Therefore, now could be the right time to buy a slice of this business to take advantage of its income and growth potential over the next decade.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2020