2 top Neil Woodford stocks for your ISA

Updated: 
GlaxoSmithKline

Making picks for your 2017-18 ISA allowance of £20,000 can be tough, but with tax-free gains on offer, we should make the most of it. One approach is to look at what the UK's top investors are doing, and ace investor Neil Woodford publishes the constituents of his Equity Income Fund for all to see.

Mr Woodford's top four holdings come from two industries. One is pharmaceuticals and healthcare, which is one of his favourite sectors, and the other is tobacco. Between them they make up 31% of his entire portfolio.

I do see a little irony in his these holdings consisting of two companies whose products damage your health, and two which strive to do the opposite, but I reckon you'd do well to hold one of each in your ISA -- and the ethics are up to individual investors.

Set for long-term growth

My pharmaceuticals pick here is GlaxoSmithKline(LSE: GSK), though I'd probably be equally happy with AstraZeneca (actually the biggest holding of all in the portfolio).

Glaxo is at the top of its industry, and I see it as offering a great combination of growth prospects and dividend income -- and that has to be the perfect combination for a long-term ISA investment.

On the dividend front, it's been steady for years and is expected to resume increases this year as the company returns to earnings growth -- forecasts suggest a 2017 yield of 5.2% on the 1,594p shares.

The company's three divisions, pharmaceuticals, consumer goods and vaccines all recorded impressive sales growth in 2016. The vaccines division led the way with growth of 14%, with new pharmaceuticals and vaccines adding £4.5bn to sales.

Some folk call for the breakup of Glaxo into three separate companies, and with new chief executive Emma Walmsley having taken over in March, the chances of that happening could well have risen. But either way, I still see a great investment here -- I'd be happy to hold the single company or all three individually.

On a P/E of 14-15 and probably entering a new earnings growth phase, GlaxoSmithKline looks cheap.

Best in sector?

Imperial Brands(LSE: IMB) is Neil Woodford's top tobacco holding, with British American Tobacco in second place, and though the two are very similar, I slightly favour Imperial right now. I think it has superior dividend prospects and I prefer its lower P/E rating, though earnings growth at British American is forecast to do a little better 

With 2016 results, chief executive Alison Cooper said: "We grew the dividend by 10% for the eighth consecutive year and remain committed to this level of increase over the medium term." Cooper's forecasts suggest decent cover by earnings of around 1.5 times. And though the dividend is expected to yield a relatively modest 4.4% this year, it should rise to 4.9% next, and I see it as one of the safest FTSE 100 dividends there are right now.

What about the long-term for the tobacco business?

Even if the actual tonnage of tobacco sold has been shrinking, Imperial has continued to grow its revenue year-on-year -- in 2016, tobacco volumes dropped by 3%, but revenues rose by 9.7% at constant currency and adjusted earnings per share by 12%.

Customers are increasingly moving to higher-margin premium brands, and there are probably millions out there who will make that same migration in the coming decades.

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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca and Imperial Brands. 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.