FTSE 100 giants GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), and National Grid (LSE: NG) (NYSE: NGG.US) are perennial favourites with investors looking for steady blue-chip stalwarts.
However, downgrades from City analysts in recent months have left both companies with more “sell” than “buy” recommendations. Should you really follow the bearish brokers and dispose of your shares?
GlaxoSmithKline
According to data provider Digital Look, nine analysts were positive on GlaxoSmithKline three months ago and four negative. The position has now shifted to five positive and seven negative.
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JP Morgan Cazenove, for example, moved to “underweight” in January and reiterated its negative recommendation after GSK’s recent results. The broker was disappointed with the company’s lack of guidance for 2015 and grumbled that “the Feb ’14 pipeline table still hasn’t been updated”.
GSK delivered earnings per share (EPS) of 95.4p for its financial year to December 2014 and paid a dividend of 80p. At a current share price of 1,540p the price-to-earnings (P/E) ratio is 16.1, which is about in line with the FTSE 100 as a whole, while the dividend yield is 5.2%, well above the market’s 3.4%.
The analyst consensus is for EPS to dip to 91.5p this year, before bouncing back in 2016. The dividend is expected to be maintained at 80p this year, before resuming growth in 2016. So, while GSK’s immediate prospects aren’t exactly sparkling, the future is brighter if we look beyond 2015.
National Grid
Energy utilities have become political footballs in the run-up to this year’s General Election. Consumer-facing groups Centrica and SSE have been in the spotlight, but erosion of analyst sentiment towards National Grid has reached a level that negative broker recommendations now outweigh positives by six to four.
Credit Suisse downgraded National Grid to “underperform” last month, joining a bear camp that includes heavyweight Goldman Sachs with a “sell” rating.
National Grid is forecast to post EPS of around 56p for its financial year ending 31 March, and to pay a dividend of 43.5p. At a current share price of 885p, the P/E is 15.8 and the dividend yield is 4.9%. So, similar to GSK, with a ballpark market earnings rating and well above average income.
Should you sell?
You have to remember that City brokers are working on relatively short-term timescales, with their one-year price targets and suchlike.
I believe it’s unwise for private investors to get too caught up in the City’s myopic concerns. We have the luxury of being able to take a much longer-term view. Routinely selling on short-term shifts in City sentiment is only likely to rack up trading costs, and enhance your broker’s wealth at the expense of your own.
If I were a holder of GSK and National Grid, I wouldn’t be selling. Indeed, while I don’t see GSK and National Grid as out-and-out bargain buys at their current prices, the combination of an average earnings rating and juicy dividend yield appears reasonably attractive for long-term investors, particularly those looking mainly for income.
