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Angels vs Devils: Should You Invest In GlaxoSmithKline Plc?

Making stock market selections are never black-and-white decisions, and investors often have to plough through a mountain of conflicting arguments before coming to a sound conclusion.

Today I am looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), and listening to what the angel and the devil on my shoulders have to say about the company.

Patent lapses hamper revenues

A wide-scale problem for numerous big-cap pharma plays, GlaxoSmithKline has seen the effect of lapsing patents on revenues across many of its key drugs weigh on revenues in recent times.

The company’s market-leading Seretide/Advair drug, which is used to treat asthma, lost exclusivity back in 2010. Although rivals have not been able to capitalise as far, US regulators simplified testing procedures for rivals to get competing products back on the market in September. This could smack turnover sooner than expected.

Exceptional pipeline set to deliver

However, GlaxoSmithKline is investing heavily in its R&D operations in order to offset the issue of patent expirations and to underpin long-term growth. The firm remains largely successful in this area, receiving another four regulatory approvals in the US, Europe and Japan during July-September, and filing another three for sign-off during the period.

Additionally, GlaxoSmithKline remains busy on the acquisition trail to aid its organic pipeline, and purchased vaccine developer Okairos for £214m in May.

Question marks loom in China

Okay, so the company’s pipeline is making steady progress, but corruption allegations in one of GlaxoSmithKline’s growing markets — China — is threatening the firm’s earnings outlook over the long term.

Although the company’s role as a major healthcare provider in the country leans in its favour, the eventual outcome — as well as the time taken for investigations to conclude — cannot be underestimated. Indeed, GlaxoSmithKline reported a 61% collapse in Chinese sales since bribery claims emerged earlier this year, a trend which could severely hamper its earnings prospects.

A reliable dividend provider

Still, GlaxoSmithKline has proved itself to be adept at keeping dividend growth rolling each year even in times of heavy earnings pressure, making it a darling for those investors seeking dependable investment income.

Indeed, City analysts expect the company to lift last year’s 74p per share payout for the full year to 77.6p in 2013, before increasing the dividend again to 81.9p next year. And these prospective payouts provide a dividend yield of 4.7% and 5% correspondingly, far ahead of the 3.1% FTSE 100 forward average.

An angelic share selection

In my opinion, GlaxoSmithKline has both the scale and the know-how to hurdle current revenues pressure and punch steady earnings expansion.

Forecasters expect earnings per share growth of 1% this year to rise to 7% in 2014, and I believe that further progress can be expected as the company’s stable of upcoming earnings drivers hit the shelves.

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> Royston does not own shares in GlaxoSmithKline. The Motley Fool has recommended shares in GlaxoSmithKline.