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GlaxoSmithKline - Broad and steady sales growth, dividend held

Nicholas Hyett | 7 February 2018 | A A A
GlaxoSmithKline - Broad and steady sales growth, dividend held

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,528.20 | Buy: 1,528.40 | Change 0.00 (0.00%)
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GlaxoSmithKline saw full year revenues grow 3% at constant exchange rates (CER) to &30.2bn, with growth across all divisions. Underlying operating profits rose 5% to &8.6bn.

The full year dividend remains unchanged at 80p per share following a final payment of 23p per share. The group expects to pay an 80p per share dividend in 2018.

The shares rose were trading up 2.3% following the announcement.

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Our View

After the half year saw GSK's new CEO announce sweeping disposals and plans for £1bn of cost savings, results are a little more relaxed this time round.

Planned cost savings are underway, and initial signs are good. The savings are being channelled back into R&D across the new target therapy areas - Respiratory, HIV/infectious diseases, Oncology and Immuno-inflammation. Given that GSK's recent batch of "new" products now account for 22% of revenues and are growing rapidly you can see the attraction.

The steady decline in revenues from Advair has been painful. However, with rivals struggling to get a generic version past the US regulator, the respiratory blockbuster is holding up better than expected. Nonetheless, the looming increase in competition remains a time bomb ticking under the group and at some point will inevitably blow a hole in the GSK income statement.

However, the varied portfolio has been delivering 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 the recurring revenues should help support the dividend.

On that note, the commitment to hold the dividend flat next year will have caught the eyes of some investors - following speculation that it could be sacrificed in favour of a big Consumer Healthcare acquisition. There's no comment on those rumoured transactions in results, and a deal later this year could yet put the dividend in doubt for 2019. At present GSK offers a prospective yield of 6.2%.

That's still speculation though. Back in the here and now the focus is firmly on improving free cash flow. Given the recent problems GSK has had in that area, this is very welcome. Free cash was less than 40 % of core operating profits last year and didn't even come close to covering the dividend expense.

GSK has some way to go before it's fully out of the woods, but early signs suggest the new CEO is willing to make the tough decisions when required.

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Full year results (CER)

Pharmaceuticals remains the dominant contributor to group sales and revenues rose 3% in the year to &17.3bn. Vaccines grew sales 6% to &5.2bn, with Consumer up 2% at &7.8bn. Group operating margin improved to 28.4%, comprising Pharmaceuticals at 34.3%, Vaccines at 31.9% and Consumer Healthcare at 17.7%.

Generic alternatives to respiratory treatment Advair/Seretide have still not been approved in the US. As a result the blockbuster drug, which accounts for around 18% of pharmaceutical revenue and 10% of group, saw revenues decline by just 14% in 2017.

However, this was more than offset by growth in new respiratory treatments, with the respiratory category up 3% overall. The group also enjoyed a strong showing from HIV, where Tivicay and Triumeq helped deliver overall revenue growth of 16%.

Growth in Vaccines was led by sales strong performances in the meningitis and flu categories, with sales up 27% and 12% respectively. Consumer growth was driven by a strong performance in power categories within the Pain and Oral categories including Volatren and Sensodyne.

Key regulatory approvals in the year include the Shingrix vaccine for shingles; Trelegy Ellipta COPD inhaler and Juluca HIV treatment.

Full year free cash flow was 14% ahead of last year, at &3.4bn. Net debt fell 5% over the course of the year to &13.2bn.

In the event no generic alternative to Advair enters the US market next year GSK expect earnings per share to grow by 4-7%in 2018. Should a generic alternative be introduced earnings per share are expected to fall by 0-3%.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.