Most people look at the GSK stock price over the last 10 years and think it’s been dead money. The share chart will show that GSK shares were trading hands for £13.40 in 2007 and are trading for £14.80 in 2017. A lot of people have become disheartened by this abysmal share price performance. But it is important to note that great companies do go through extended periods of share price stagnation. And just because a company’s share price has stagnated does not mean wealth is not being created. GlaxoSmithKline is a classical example of this phenomenon.
The persistent negative news-flow the company has faced over the past 10 years in terms of bribery scandals and patent expirations is a huge reasons as to why shares in GSK have barely budged over the last 10 years. But in spite of all the problems faced , the company has powered through and made the necessary changes to both its internal practices and its product portfolio. Its core economic engine remained intact all through the times of adversity which is a sign that it is a high quality company. It is for this reason that shareholders in the company have been rewarded well. Investors could have grown their wealth at a rate of 86% over the past 10 years.
So how could an investor get returns of 86% despite the stock price barely budging. The answer lies in the dividend that Glaxo pays. As a result of the high cash payout, the shares of GlaxoSmithKline have been a compounding machine these past ten years. Collecting 5% or 6% dividends over and over again for ten years amidst share price stagnation does improve GSKs story.
Say for instance you owned 10,000 shares in Glaxo in the year 2007. If all you did was click the re-invest button on your brokerage account, you would have been adding new shares every quarter. In 2007 you added 379 shares, in 2008 you added 510 shares, in 2009 you added 582 shares, in 2010 you added 605 shares, in 2011 you added 642 shares, in 2012 you added 691 shares, in 2013 you added 668 shares, in 2014 you added 747 shares, in 2015 you added 1,110 shares, in 2016 you added 849 shares and so far in 2017 you have gained 636 shares. In total, since 2017, an investor which owned 10,000 shares who’d have increased their share count to 17,419. That’s a 74% increase! You would have gone from earning £5,068 in dividend income in 2007 to earning an estimated £13,640 this year. A dividend increase of 169%! In terms of total return, reinvesting Glaxo shares made you 86% over the past decade. Dead money I hear you say?!
And here is the important part of re-investing which is often overlooked: When you choose to re-invest, you paradoxically become more reliant on the share price of the company into which you reinvest. As an investor who is still in the wealth accumulation stage of your life (LINK) you should wish for the stock price of the company you are reinvesting in to languish as this way you are able to buy more and more shares with the dividends you receive. This is why GSK has been such a good wealth creator over the years. It’s stock prices has traded at a modest valuation giving investors the chance to re-invest their dividends on the cheap. You should only wish for an uptick in the share price once you have stopped re-investing the dividend. A slight uptick in share price will cause an outsized return for an investor who was reinvesting their dividend at depressed valuations.
All the articles about “waiting it out” and “being patient” with GlaxoSmithKline are somewhat overwrought. I hope every “bad investment” works out for you the way GlaxoSmithKline has worked out for shareholders. It is the Netflixs and Teslas that get all the attention because they deliver quick, instant gratification in terms of rising stock prices, but that won’t be taking care of you twenty years from now because bad things happen when you buy 80x or 100x earnings for a stock. If you learn nothing else from value investing, it should be that dangerous long-term results accompany companies that trade at P/E ratios that are disconnected from basic fundamentals.
The connection between the dividend income that GSK will pay out to shareholders over the long term and the relatively small amount that shareholders need to invest to generate that high income should be the source of meaningful income for people planning to retire ten to fifteen years from now. You can start to see how buying a couple hundred shares of GlaxoSmithKline and holding it to reinvest for a decade or so can give you a “wow” income stream a decade from now.
Glaxo is a textbook example of a dividend stock which is building wealth even while the perception exists that shareholders are getting nowhere. No, these are not the glory days of GlaxoSmithKline. But the current performance, with dividends reinvested, is a heck of a consolation prize. Investors should root for the earnings per share and revenues to start increasing sooner rather than later, but should enjoy the valuation in the 1200-1600 range for as long as possible because it is this low valuation mixed with reinvestment that will give you an impressive yield-on-cost ten to fifteen years from now.