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GlaxoSmithKline - Profits up 9%, dividends flat

Nicholas Hyett | 26 April 2017 | A A A
GlaxoSmithKline - Profits up 9%, dividends flat

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,545.60 | Buy: 1,546.00 | Change 11.20 (0.73%)
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Adjusted first quarter operating profits of £2bn rose 9% at constant exchange rates (CER), as positive performance from Pharmaceuticals and Vaccines more than offset weakness in Consumer.

The group announced a Q1 dividend of 19p per share and continues to target a full year payment of 80p per share.

The shares fell 1% following the announcement.

Our View

For the first time in a long time GSK looks to be facing more tailwinds than headwinds, with the group targeting earnings growth of mid-to-high single digits out to 2020.

GSK's varied portfolio has been delivering a good level of broad-based growth in recent quarters. In particular the increasing contributions from the Consumer Healthcare and Vaccines divisions (now over 40% of group sales combined), should reduce reliance on blockbuster drugs and strained western healthcare budgets. It's a sensible strategy and helps to support the dividend (the current prospective yield is 4.9%).

The steady decline in revenues from Advair, the blockbuster respiratory drug, has been painful, and there is more pain to come before that process is over. However, GSK's suite of new drugs is growing rapidly to fill the gap. Meanwhile, the group's integration and restructuring drive seems to be on track. That is helping to boost margins across the business and converting increased sales into increased profits.

Currency is providing a hefty boost to earnings at the moment - revenue for example rose 5% at constant exchange rates but 19% at actual exchange rates. However, there's a dark side to that currency movement too. GSK borrow in dollars as well as pounds, and the value of that debt increased by £2.2bn in 2016 as a result of a weaker pound. It doesn't help that the dividend still isn't covered by free cash, although this is moving in the right direction.

Our concern with GSK is that historically, earnings quality has been low. "Exceptional" restructuring and legal costs have been far from exceptional, while profits have not been well backed up by cash flow. That seems to be changing, but, while we like the direction GSK is heading, we're sitting on the fence for now.

First Quarter Results (CER)

First quarter sales rose 5%, with growth across all divisions (Pharmaceuticals up 4%, Vaccines up 16% and Consumer up 2%). Adjusted operating margins have improved, up 1 percentage point to 26.8%, thanks to improved operating leverage from higher sales and more favourable mix in Pharmaceuticals.

Sales from new Vaccine and Pharmaceutical products were up 52% on 2016. The respiratory portfolio and Bexsero meningitis B vaccine delivered particularly strong performance while HIV treatments Tivicay and Triumeq both saw more than 40% growth. The new products portfolio now accounts for 26% of total vaccines and pharmaceuticals sales, with new respiratory more than offsetting the decline in Advair sales.

Growth in Consumer was negatively impacted by the disposal of the Nigerian beverages business as well as tougher trading conditions. However, this was more than offset by strong 'power brands' performance, particularly in Oral Health, which includes the Sensodyne brand.

Developments in the pipeline during the quarter include; positive results from the SWORD HIV trials and launch of Flonase Sensimist as an over the counter product in the US.

GSK generated free cash flow of £650m in Q1, versus a £0.2bn cash outflow in Q1 2016, reflecting the improved operating performance and positive currency effects. Net debt of £13.7bn was 10% ahead of last year, although slightly below Dec 2016's £13.8bn.

The group will be publishing a review of the business alongside Q2 results, and 2017 guidance remains unchanged.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.