Heading for Healthcare

Morningstar columnist Rodney Hobson explains why he is loading up his portfolio with shares in GlaxoSmithKline

Rodney Hobson 18 January, 2013 | 1:28PM
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In Defence of Glaxo

After seeing several dividends from a variety of shareholdings pile up in my ISA account I decided to reinvest this week in GlaxoSmithKline (GSK), one of my top four holdings and a solid performer.

The shares have not increased dramatically since my original investment, which I made in 2011 as I rebased my holdings away from the construction and house building sector, where I was overweight. Even so, the holding is up more than 8%, a good deal better than I could have got in a bank or by holding gold, and I have had dividends on top.

I took another look at Glaxo because a reader asked for my views on the shares, in particular its merits as a defensive stock, and the new purchase is already marginally ahead. You can find a full explanation of defensives versus cyclicals in my book How to Build a Share Portfolio but it is worth revisiting the issue briefly here:

Defensives are the companies that tend to put in a solid performance irrespective of economic conditions. They offer products and services that we need all the time. Utilities such as gas, electricity and water are defensives. So are pharmaceuticals such as GlaxoSmithKline. You can’t decide you won’t become ill just because you are short of cash.

Cyclicals are the companies whose fortunes rise and fall with the economic cycle. Toy maker Hornby (HRN), for instance, has been the worst performer in my portfolio as its model trains, racing cars and aircraft kits seem frivolous when costs of basic needs such as food and energy are soaring.

That does not mean that defensives are immune to economic downturn. When spending is squeezed, defensives are squeezed – just not as badly as cyclicals. Investors also need to remember that a badly run defensive company will fare badly over time. So even if you follow my personal preference for solid companies paying solid dividends, you still need to be selective.

At around 1,370p, Glaxo shares are only about 40p above November’s lows and are way below the rather optimistic level of 1,500p struck last August. The yield, based on 2011 profits (the last full year available) is an attractive 4.8% and that figure will surely be above 5% when 2012 results come out.

The risk with pharmaceutical companies is that research is expensive and uncertain but new drugs are needed to replace those whose patents expire. Meanwhile governments around the world have tried to cut back on health spending.

Nonetheless the world is aging and people are living longer – long enough to get ailments and diseases. As far as defensives go, this sector is as good as they come.

Job Curtis, who manages the Gold-rated City of London Investment Trust (CTY), has also expressed an interest in Glaxo. Find out directly from Curtis why he likes this pharma giant by watching the video, "Fund Managers' Favourites: Top Dividend Picks".

Unlike for Like (The Official Version)

My suggestion that one should not take too much notice of like-for-like retail figures has found an echo in a somewhat more authoritative and wider ranging report by the Institution of Chartered Accountants in England and Wales.

I have on several occasions, most recently regarding the latest trading figures from Marks & Spencer (MKS), put forward the comment that the growth of online trading by established High Street chains makes the relative performance of individual shops less relevant.

Now the institute raises wider issues. It says different retailers use different ways of measuring like-for-likes, which are meant to give a more accurate view of trading by stripping out the opening and closing of stores.

Furthermore, higher like-for-like sales do not necessarily translate into higher profits. In fact, sales volumes can be driven by reducing prices and therefore profit margins. Higher, less profitable sales can put a strain on working capital.

So the lesson is that while like-for-like sales can give clues to a retailer’s performance, it has to be seen as part of an overall picture. And oh yes, there is no substitute for profits, as Kate Swann demonstrated at WH Smith (SMWH).

When the Music Stops

HMV has been a long time dying, but as with Northern Rock and Bradford & Bingley in the financial crash, those shareholders who stayed in to the bitter end have only themselves to blame for their losses. At HMV, the writing has been on the wall in very large letters for the past five years.

Administrators hope to salvage something from the mess but shareholders will get nothing. Cash raised will pay the administrators, then creditors. The shares closed at 1.1p before being suspended. To believe that the shares were worth even a penny shows how blindly optimistic some investors can be.

Market Performance: January 14 - 18

FTSE 100 Index: +0.54%
FTSE 250 Index: +1.16%
FTSE All Share: +0.62%
FTSE Small Cap: +0.66%
FTSE AIM 100: -0.18%
FTSE Fledgling: +0.58%

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Rodney Hobson is a long-term investor commenting on his own ideas and portfolio; his comments are for informational purposes only and should not be construed as investment advice.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GSK PLC1,618.00 GBX0.09Rating
Hornby PLC21.00 GBX0.00
Marks & Spencer Group PLC303.30 GBX0.23Rating
WH Smith PLC1,171.00 GBX-0.59

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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