Should You Ditch GlaxoSmithKline plc And Buy Vectura Group PLC And SkyePharma PLC?
With the stock market having been akin to a rollercoaster ride so far in 2016, many investors are understandably seeking out defensive stocks. This makes sense because a volatile portfolio is never much fun and can lead to a great deal of worry and the potential for sleepless nights.
One stock that offers defensive characteristics is GlaxoSmithKline(LSE: GSK). Part of the reason for this is the fact that its profitability is less positively correlated to the performance of the global economy than is the case for most of its FTSE 100 peers. In other words, GlaxoSmithKline depends less on GDP growth and more on a strong drugs pipeline for its bottom-line growth. As such, even if there's further volatility in share prices, GlaxoSmithKline could continue to outperform the FTSE 100, as it has done since the turn of the year, by over 5%.
In addition, GlaxoSmithKline also pays a superb dividend. It currently yields 5.8% and although dividends are due to flatline over the next couple of years as the company implements a major restructuring programme, its shareholder payouts remain relatively high and consistent. During a period of uncertainty this is a superb ally for nervous investors.
As well as defensive attributes, GlaxoSmithKline also has a strong pipeline of new drugs that have the potential to rapidly increase its sales and profit over the medium-to-long term. In fact, GlaxoSmithKline's portfolio is one of the most diversified in the business and it has real potential to generate multiple blockbuster drugs, with its ViiV Health Care subsidiary being of key importance to the company's long-term growth. And with its bottom line due to be positively impacted by cost cuts, GlaxoSmithKline seems to be an excellent buy for the long term.
What's the alternative?
Of course, it's not the only stock in the pharmaceutical sector that could be worth adding to your portfolio. In fact, there are a number of companies that offer tremendous forecast growth rates and yet trade on highly appealing valuations.
For example, airways diseases specialist Vectura(LSE: VEC) is forecast to increase its bottom line by 116% in the next financial year following what's expected to be a profitable year in 2016. And with its shares trading on a price-to-earnings (P/E) ratio of 53, this equates to a price-to-earnings growth (PEG) ratio of only 0.5. This indicates that they could deliver improved performance following their fall of 8% in the last six months.
Similarly, drug delivery specialist SkyePharma(LSE: SKP) is due to post a rise in its bottom line of 51% in 2016. When combined with its P/E ratio of 25.6, this equates to a PEG ratio of only 0.5 and indicates that there's considerable upside potential. As with Vectura, SkyePharma pays no dividend and isn't expected to commence shareholder payouts this year. In addition, the two companies are much smaller than GlaxoSmithKline and arguably offer less defensive characteristics or stability, but do have greater growth potential.
As such, a mix of all three stocks seems to be a sound move, although for investors who are only able to buy one of the three companies, GlaxoSmithKline appears to have the perfect mix of growth, income and defensive qualities.
Peter Stephens owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.