GlaxoSmithKline Dives on Weak Growth


LONDON -- "Big pharma" giant GlaxoSmithKline (NYS: GSK) slightly disappointed its owners today, as its latest results revealed low growth in turnover and earnings.

GSK's slow growth
As soon as GSK's first-quarter results came out at noon British Summer Time, its shares dropped vertically, taking today's decline to 40 pence.

So, why the price drop -- what spooked GSK's owners to sell their shares at first glance of these figures? Speaking as someone who has owned Glaxo shares for around 20 years, I have to say I was not impressed with its top-level growth and I also dislike its rising financial and general expenses.

Could do better
For the first quarter of 2012, GSK's turnover was 6.6 billion pounds, a 2% increase at constant exchange rates. In terms of its core businesses, operating profit was up 3% to 2 billion pounds, producing earnings per share of 27.3 pence, up 7%.

However, GSK is undergoing something of a transformation as it sells off noncore assets and restructures its research and development operations to invest for growth. Taking account of discontinued businesses and disposals, EPS was down a disappointing 10% to 26.7 pence.

Then again, GSK is a monster when it comes to generating cash. Thanks to huge sales of prescription drugs -- plus household name brands such as Aquafresh, Lucozade, Panadol, Ribena and Sensodyne -- the FTSE 100 firm generated 1 billion pounds in cash from January to March.

At first glance, GSK has a dizzying level of net debt: 8.9 billion pounds as of March 31, down from 9 billion pounds at the end of 2011. Reassuringly, this is less than 12.4% of GSK's market value, so the group is relatively lightly geared. Indeed, Sir Andrew Witty, GSK's CEO, intends to use the group's strong balance sheet and ultra-low borrowing costs to increase its debt and operational leverage.

Up goes the dividend
The thing that pleases me most about being a GSK shareholder is the clockwork regularity with which GSK increases its cash payouts to its owners. Once again, the group upped its quarterly dividend, this time by 6% to 17 pence from 16 pence. That extra penny really does mean a lot to those happy shareholders owning thousands (or even tens of thousands) of GSK shares.

In addition to hiking its dividend, GSK is to increase the amount it spends on buying back its own shares. In the first quarter, GSK spent 226 million pounds on share buybacks, but has set aside another 2 billion pounds to 2.5 billion pounds for more purchases, funding partly from selling off noncore operations.

In effect, adding together GSK's dividend yield and share buybacks, the company is offering shareholders a "dividend plus buyback" yield as high as 8.5% this year, which is a handsome return to its patient owners.

A core holding for income investors
GSK is a popular pick among fund managers seeking solid, rising dividends, including star manager Neil Woodford of Invesco Perpetual. How does it stack up value-wise today?

At its current price of 1,422.5 pence, GSK trades on a forward price-to-earnings ratio of 11.9 and offers a prospective dividend yield of 5.1%, covered a comfortable 1.6 times. This puts it on a lower rating than the FTSE 100 index, but with a dividend more than a third higher than the market as a whole.

Hence, GSK should still appeal to value seekers and dividend devotees. Indeed, I'd be happy to add to my family's holding at these levels!

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