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After a sizeable surge since Halloween, the FTSE 100 index is taking a breather. As I write, the index is down roughly 125 points (1.9%) from Monday’s mid-afternoon peak of 6,455. Nevertheless, the Footsie has gained almost 745 points (13.3%) since October, making this a positive month for UK shareholders. On the other side of the Atlantic, news of a highly effective Covid-19 vaccine from US biotech Moderna lifted stock prices again. Yesterday, the S&P 500 index closed at a record closing high of 3,627 points, up 11.2% in 2020. Despite these recent rises, I still see hidden value in quality FTSE 100 companies selling cheaply today. For example, I’d buy these cheap shares right now.
GSK is one of my favourite FTSE 100 stocks
Habitual Fool readers will know that I write about GlaxoSmithKline (LSE: GSK) more often than almost any other FTSE 100 firm. That’s because I regard its cheap shares of one of the biggest low-risk bargains in the entire Footsie. Having been a GSK shareholder for most of the past 30 years, I’ve followed its fortunes over the decades. Also, I’ve had a couple of close relatives work in leading scientific roles at GSK, so I’ve seen the company from the inside.
Under new CEO (and recent Dame) Emma Walmsley, GSK has been undergoing enforced evolution. It is now focused on being a world leader in immunology, oncology (cancer), HIV/AIDS, respiratory treatments, and vaccines. And, being the UK’s second-largest pharmaceutical company, you’d expect the Covid-19 pandemic to boost GSK’s share price, right? Wrong, because these cheap shares just keep getting cheaper.
As I write, the GSK share price is 1,395p, having falling back 47p (3.3%) overnight. Although this is 111p (8.6%) above the stock’s 52-week closing low of 1,284p on 30 October, I believe GSK’s cheap shares have far further to rise. After all, at their 2020 high on 24 January, they closed at 1,857p, which is 1.33 times the current price. In other words, GSK shares have fallen almost exactly a quarter (24.9%) in 10 months, which puts them in crash territory.
In my view, GSK’s cheap shares should appeal to a wide range of conservative investors, such as value seekers and income investors. GSK is what I call an ‘SLR share’, in that it offers Safety, Liquidity, and Returns, as follows:
- Safety: GSK is a FTSE 100 heavyweight with a market value of £73.4bn, so you know it’s not going to go away any time soon.
- Liquidity: GSK shares are among the most liquid, being easy to buy and sell in very large quantities.
- Returns: For the past five years, GSK shares have paid a yearly dividend of 80p.
Today, GSK’s cheap shares offer a chunky dividend yield of 5.73%. This is about 1.8 times the FTSE 100’s dividend yield of roughly 3.2%. In fact, at £4bn a year, GSK’s yearly cash payout is the fifth-largest by size in the entire UK stock market. Also, GSK’s stock is cheap in historical valuation terms. It trades on a price-to-earnings ratio of around 10.8 and an earnings yield of 9.3%.
For me and other GSK shareholders, 2020 hasn’t been a great year. But I think 2021 will see GSK producing much higher returns, especially for investors buying in at these depressed prices. That’s why I’d buy these cheap shares today, ideally inside an ISA, to pocket decades of tax-free cash dividends and future capital gains!
Cliffdarcy owns shares of GlaxoSmithKline. The Motley Fool UK 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.