The Investment Case For GlaxoSmithKline plc
GlaxoSmithKline (LSE:GSK) (NYSE: GSK.US) has great credentials as a cornerstone share. It’s defensive, has a good yield and reliable dividend, and for growth offers a play on the health-care demands of an ageing demographic in the developed world and growing health-care spending in emerging markets.
Importantly, it has overcome the scourge of pharmaceutical companies — the dreaded patent cliff, which sees generic products savaging branded drug sales. Analysts are forecasting a small return to revenue growth for 2013. Diversification into lower-risk vaccines and over-the-counter medicines adds stability.
Defensive shares are hard to come by these days. The tobacco industry is under constant fire, the defence sector is bombarded by cuts, utilities have been trashed by the threat of a Labour administration, and the share price of consumer staples firms have gone to a premium as investors chase reliable yields. GSK’s pharmaceutical rival AstraZeneca has turned itself into something of a biotech play as it struggles with a serious patent cliff.
The defensive characteristics of pharmaceuticals were demonstrated in the financial crash. When the FTSE 100 halved in value between October 2007 and March 2009, the pharma sector lost just 15%.
Impressively, GSK has paid an increasing dividend for over 20 years. Management has stretched the dividend cover to achieve that record but analysts’ forecasts anticipate cover returning to 1.5 times, and the dividend has consistently been covered by cashflow.
With a prospective yield of 4.9% at the current share price, GSK offers an attractive income.
GSK’s size means it can spend heavily on research and development, the fuel that replenishes branded drugs as they reach the end of their patent protection. There’s inevitably an element of chance involved in the discovery and bringing-to-market of new drugs, but GSK’s scale diversifies the risks. With an ageing population in the west, and growing discretionary spending on health-care in emerging markets, there’s plenty of scope for growth.
GSK diversified into vaccines and over-the-counter health-care — from Aquafresh toothpaste to Zovirax for cold sores — in order to reduce dependence on discovery of blockbuster drugs. The strategy has been successful, with vaccines and health-care together contributing about a third of total sales.
A push into emerging markets has also paid off and offers further growth opportunities, though the company’s alleged wrongdoings in China highlight the inherent dangers.
> Tony owns shares in GSK and AstraZeneca. The Motley Fool has recommended shares in GlaxoSmithKline.