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GlaxoSmithKline - split on track, but dividend set to be lower

Nicholas Hyett, Equity Analyst | 3 February 2021 | A A A
GlaxoSmithKline - split on track, but dividend set to be lower

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GlaxoSmithKline plc Ordinary 25p

Sell: 1,386.20 | Buy: 1,386.40 | Change -26.00 (-1.84%)
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GlaxoSmithKline (GSK) reported full year revenue of £34.1bn, down 2% on an underlying basis with all divisions reporting a decline in sales. Underlying operating profits came in at £8.9bn, rising 2% at constant exchange rates, with underlying earnings per share of 115.9p.

GSK announced a 23p dividend, taking the full year total to 80p. The group plans to pay the same amount in 2021, but beyond that point will introduce a new policy with the overall payout "expected to be lower than at present".

The group is on track to split its BioPharma and Consumer Healthcare businesses in 2022.

The shares were down 2.7% following the announcement.

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Our view

GSK's full year results are something of a mess. The acquisition of Pfizer's consumer business, the addition of oncology portfolio's from TESARO and Merck and the disposal of Horlicks, means tracking the GSK's underlying performance is more difficult than usual.

However, it's fair to say the group's struggling against some formidable headwinds.

You might have thought a global healthcare crisis would be good for pharma groups. However, GSK's own vaccine candidates are still in trial phases, and as a result the effect of the pandemic has been all negative. Non-coronavirus vaccines - a key money spinner for GSK - have been delayed and demand for other pharmaceutical products has been hit as lockdowns kept patients away from doctors' surgeries.

Meanwhile the group is dealing with fallout of patents on certain key drugs coming to an end. That's an inevitable part of being in pharmaceuticals - but the collapse in Advair and Ventolin sales is offsetting much of the progress in newer drugs. That headwind has further to run.

Meanwhile the Consumer Healthcare business is showing some very mixed results - with good numbers for vitamins and minerals (largely acquired from Pfizer) offset by lacklustre performances elsewhere.

It's not a perfect backdrop for the transformational plans CEO Emma Walmsley has for the group. By 2022 it will have split into two companies, one taking the BioPharama assets and the other the Consumer Healthcare brands.

In general, we think the move makes sense. Two businesses with a sharper focus should be more efficient than one conglomerate, and it will help reduce the confusion around exactly what GSK is offering investors. But it also means investors are buying into what will one day be two radically different businesses.

The consumer division should be a 'steady eddie' with hopefully more predictable returns. As one of the world's largest over-the-counter medicines businesses, it should be able achieve significant efficiencies, ultimately giving the group attractive margins.

However, performance form these brands leaves a something to be desired. We also expect the new company to get saddled with a disproportionally large share of the group's debt when it goes its own way, and that could hamper shareholder returns.

For the pharma group, losing the steady cash flows of the consumer business means there's more pressure on the labs. When drugs lose patent protection sales can quickly collapse. That's already a problem for GSK, so it's vital its research teams deliver the next generation of blockbusters.

The pipeline has delivered some reasonable results thus far - although it's been unable to offset the loss of legacy sales more recently. HIV, Oncology and Vaccines are all delivering new drugs with 57 medicines and vaccines in development.

The problem any pure-play pharmaceuticals business faces is that even the most promising drugs can fall at the final hurdle. However, given the increased focus on vaccine preparedness we see the vaccines business as something of a jewel long term.

It's also worth noting that management expect the separate businesses to pay a lower dividend overall than GSK has been able to support to date. The size of that cut is as yet unclear.

While we see some real bright spots in GSK, there's a lot of murky corners too. A 5.8% prospective dividend yield will inevitably attract some investors, but remember that's only temporary and not guaranteed. In its present form GSK struggles to present a clear picture of what it offers investors -hopefully its successor companies are a little more streamlined.

GSK key facts

  • Price/Earnings ratio: 11.8
  • 10 year average Price/Earnings ratio: 13.7
  • Prospective dividend yield (next 12 months): 5.8%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results (constant exchange rates)

Sales in the Pharmaceuticals business fell 1% in the year to £17.1bn. The decline was driven entirely by the Established Pharmaceuticals business, which saw sales fall 15% to £7.3bn. That reflects continued declines in asthma treatments Seretide/Advair and Ventolin following the introduction of generic substitutes and the rise of generic antibiotics. Outside the Established portfolio pharmaceutical sales rose 12%, with particularly strong results from the small Oncology division, which saw sales rise 62%

Vaccines sales fell 1% to £7.0bn. Again, Established Vaccines were the driver of the decline, down 14% to £3.2bn. Influenza vaccine sales rose 37% while Shingles vaccine Shingrix saw sales rise 11% to £2.0bn. The division was severely affected by the pandemic, which reduced visits to healthcare settings.

A 2% decline in Consumer Healthcare sales, to £10.0bn, although grew 4% if you exclude brands earmarked for sale. The group saw particular strength in the Centrum, Caltrate and Emergen-C brands - driving high-teens percentage growth Vitamins, minerals and supplements category. Sensodyne, Panadol and Voltaren also performed well, with Respiratory and Skin brands weaker.

Free cash flow of £5.4bn in the year was up 7% on 2019. Together with £3.3bn in proceeds from the sale of Horlicks and other Consumer brands that drove a 17.6% decline in net debt to £20.8bn.

Underlying earnings per share are expected to fall by a mid to high-single digit percentage next year. That reflects increased investment in new product launches and the impact of the pandemic on vaccine programmes. Guidance for 2022 remains unchanged.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.