In recent years, GlaxoSmithKline (LSE: GSK) has been a major disappointment for its investors. Its share price has slumped by 12% in the last three years as bribery allegations, the loss of patents on key drugs, and a lack of sufficient replacements have come together to hurt the company’s top and bottom lines. And while GlaxoSmithKline’s shares may have outperformed the FTSE 100 in the last year, they are still down by around 4% during the period.
The anticipation of improved profitability
As a result of this, many investors may feel that GlaxoSmithKline is a stock to avoid at the present time. However, this does not appear to be justified, with the diversified health care stock reporting a very encouraging set of results recently which showed that it has stunning long term potential. For example, it’s experiencing strong sales and profit growth, and is on-track to report higher growth figures than many of its peers and the wider index.
In fact, GlaxoSmithKline is expected to reverse four years of earnings declines by posting a rise in its bottom line of 16% in the current year, followed by a rise in net profit of 4% next year. Although earnings per share will still be well below their 2011 level even after such impressive growth, the key takeaway is that investor sentiment could begin to improve due to a step change in GlaxoSmithKline’s financial performance. And, as history shows, the anticipation of improved profitability can often lead to sharper share price gains than the actual reporting of such profits.
Clearly, rising profitability is excellent news for GlaxoSmithKline’s dividend and while it is set to be held at its current level over the next couple of years, in the long run there is considerable scope for a sustained rise in shareholder payouts.
An excellent defensive profile
That’s largely because of the strength of GlaxoSmithKline’s vaccine division, as well as an impressive pipeline within its pharmaceutical division, which includes exciting new treatments in the ViiV Healthcare segment. They have the potential to make a huge difference to sales and profitability, while GlaxoSmithKline’s consumer goods offering should provide relatively stable and consistent returns, too. GlaxoSmithKline’s yield of 5.5% is high and could benefit from a rapidly rising dividend over the medium to long term.
As well as offering sound financial performance, GlaxoSmithKline also offers an excellent defensive profile. As alluded to, it is not a pure play pharmaceutical company and so its bottom line could prove to be much more robust than some of its sector peers.
Furthermore, GlaxoSmithKline is not highly dependent upon the business cycle, which means that during periods of economic uncertainty its shares could become increasingly popular among investors. With an EU referendum and US election due over the coming months, GlaxoSmithKline’s share price could therefore soar, rather than bomb.
