Swapping BP for Glaxo

As I mentioned in my recent portfolio review, I have decided to start to swap some of my holding in BP and buy more shares in the pharmaceutical company Glaxo.

Firstly, lets take a look at some of the fundamentals of both the companies:

In terms of PE ratios, BP seems like a better bet but it’s yield is slightly less (though better covered than Glaxo’s).

Both companies have suffered from bad publicity in recent times which has affected the share price. Glaxo’s price dropped in the recent past due to a scare related to one of its diabetes drugs while BP had saftey problems in Alaska and Texas. I think in both cases these fears have caused the prices to drop too far and both companies could be thought of as Crisis plays.

Looking at the share prices, BP has recovered significantly from its low of around 500p, whereas Glaxo is still trading around its low which gives me hope that there’s more scope for improvement here. Thats not to say the Glaxo price can’t fall even lower.

Overall, I think that both companies are good investment. Both are well run companies that have a good record of both increasing their dividends and buying back their own shares.

Given that I like both companies, you may ask why did I switch? If you are a reader of this blog, or of any financial newspapers you may have heard a lot about financial problems on the horizon. Take a look at some of the links in this post to see what I mean. My thoughts are that at this time it may be advantageous to witch into defensive companies that will suffer less in a bear market.

As a health company, Glaxo is relatively uneffected by what is happening in the economy. Sick people still need to buy medicine, even in a bear market. These guaranteed earnings mean that glaxo will fare better in a tough economic environment where other companies are suffering.

In terms of PE ratios, Glaxo’s 13.5 is higher than BP (meaning its more expensive) BUT traditionally Glaxo has had a PE ratio of around 18. I suspect that once the bear market does arrive, people may well re-examine this figure and the share could get re-rated as its defensive properties become desirable.

What do you think? Was Swapping BP for Glaxo a good idea?