GlaxoSmithKline: a share supported by a good yield, a potential special shareholder return and potentially supportive news flow.
When I first started to put pen to paper on this pre-trading statement appreciation of GlaxoSmithKline, the share price was 1626. In terms of years, Shakespeare was dead and buried by 1626. The share price now, as I resume the task, is 1576 – a year when Will Shakespeare was alive but before he had commenced his career as a playwright and shareholder in the Globe theatre company. So, do I press on in a conviction that GlaxoSmithKline is good value or take heed of the weakness in the share price? Is this a share that should be taken in a 1576p flood or left to float down river for a better opportunity?
Looking at the share price chart, I see that it has reached a support level on an uptrend that began in January and off which it seems ready to bounce; a not unreasonable speculative prognosis when the historic dividend yield is 5% despite the fact that in the last six months the share price rise of 22% has outpaced the 14% increase in the FTSE 100 Index. That after all, is the thing that is responsible for the new up-trend.
The Q3 statement for the year ended 31st December 2014 (it was published in October) stated that core earnings per share rose 5% to 27.9p before the payment of dividends and the benefit, or otherwise, if disinvestment. The Q3 dividend was in fact maintained at 13p. It is estimated that the dividend payout for Q4 will be increased by 3% making an annual dividend of 80p; hence the annual dividend yield of 5% for last year.
GSK in its latest corporate manifestation, has been resolved into three distinct areas of business activities: the discovery of pharmaceutical therapies; vaccines and healthcare.
The strategy followed by the management is to grow the company as a diversified global business. However, it looks as that the diversification is by market territory and less by activity, as one may reasonably suppose; a more specialised company by product and therapeutic activity, maximising returns by serving more market territories with those specialist activities. To that end, GSK has sold its oncology (cancer treatment) activities. It now has a late stage pipeline of research and development which the management believes will drive sales and profits over the next five to ten years. That pipeline includes in Phase II/III ’Mempolaze’ a potential treatment for severe asthma.
This change of activities and product mix is calculated to improve cost efficiency, margins and cash generation. Investor rewards, for this year include a maintained annual dividend of 80p a share plus a return of cash to shareholders to the tune of $4 billion, on the completion of deals and transactions.
It is evident that there is potential in the R&D programme of GSK. However, it is likely to emerge beyond the next year or so. Consequently, the share price is likely to driven by news of progress in the meantime. That will be more than just news of success of clinical trials. There should also be news of a commercial and financial kind to keep the share price moving ahead or at least reasonably stable.
The first is news of dividends increasing modestly this year and next. By a market consensus estimated 1% this year to 80.95p (giving an estimated dividend yield of 5.1% for this year) and an estimated 5.1% again for next year.
There should also be positive news on the completion of the asset swapping deal with Novartis as well as the B share scheme which is planned to return £4 billion of value to shareholders. That translates into a special return to shareholders of 5.2% on the current market value, which along with the estimated 5.1% dividend yield holds out a reliable looking potential simple average annual return on GSK shares over this year and next of 7.7% (I have assumed two dividend yield returns of 5.1%, added the estimated 5.2% return from the share B return and divided by two.)
In short, GSK represents a global business overwhelmingly outside any political blight of the coming UK election, with a foreseeable above average income return. At the moment the shares, having broken out of the share price downtrend from the twin share price peaks of 2013, have come back to what looks like a potential support level on the new uptrend. I invite you to take a look at the three and four month share price chart and to observe whether it bounces. This is an interesting share in terms of its share price technicalities and its income potential. One to have a look at, in my opinion.