GSK and Aviva: 2 FTSE 100 shares with bright futures

Robert Stephens, CFA, highlights the potential for improving share price performances from two FTSE 100 stocks.

Recent months have highlighted how quickly and dramatically the investment landscape can change. Indeed, a number of FTSE 100 stocks are currently in the process of shifting their focus and restructuring their operations to improve their long-term financial prospects.

Two examples are Aviva (LON:AV.) and GSK (LON:GSK). They are set to become very different businesses over the next few years because of the changes being enacted by their respective management teams. As a result, now could be an opportune moment to buy them while their shares trade on low valuations.

Aviva

Aviva is seeking to refocus its resources in markets such as the UK, Ireland and Canada where it has a clear competitive advantage over rivals. It is also seeking to simplify its operations to improve customer satisfaction levels and strengthen its market position.

As a result, it is in the process of making a relatively large number of asset disposals. They included the recent sale of its operations in Italy and France alongside previously announced disposals in Turkey, Singapore and Hong Kong.

The firm’s asset sales are expected to strengthen its financial position as part of plans to reduce debt by £1.7bn in the first half of 2021. It also expects to make £300m in net savings by the end of 2022. Its income prospects may tempt many investors, since it expects to make a ‘substantial’ return of capital to its shareholders alongside dividends that place the firm on a forward yield of 5.6% for the current year.

Clearly, a large number of asset disposals in a limited amount of time can create uncertainty in what remains a challenging economic environment. However, Aviva’s forward price-earnings ratio of 8 suggests that investors are factoring in a period of change. As such, the stock could offer long-term investment appeal.

GSK

GSK’s plan to split into two separate businesses is well underway. Indeed, the healthcare company’s latest results highlighted that it is on track to split into a biopharma-focused business and a consumer healthcare firm in 2022. This has the potential to create £800m in annual cost savings by 2023, while providing the two companies with greater focus in delivering long-term growth.

The new consumer healthcare company will own numerous global brands that could deliver strong and stable growth. Meanwhile, its pharmaceutical business plans to launch over 20 new products by 2026. Around half of them are expected to have annual sales in excess of $1bn. They could benefit from ongoing global changes such as increasing urbanisation and an ageing population that are expected to persist beyond the current pandemic.

In the short run, GSK’s split means uncertainty and the prospect of lower dividends than in recent years. This has contributed to the stock’s 34% underperformance of the FTSE 100 in the past year.

However, the company’s 4.3% forward dividend yield and price-earnings ratio of 12.5 appear to price in these threats, while failing to acknowledge the long-term growth opportunities provided by the firm’s split. As such, it may provide an attractive risk/reward investment opportunity.

Robert Stephens, CFA: Robert Stephens, CFA, is an Equity Analyst who runs his own research company. He has been investing for over 15 years and owns a wide range of shares. Notable influences on his investment style include Warren Buffett, Ben Graham and Jim Slater. Robert has written for a variety of publications including The Daily Telegraph, What Investment and Citywire.