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Is GlaxoSmithKline plc about to crash?

Photo: Ian Wilson. Cropped & adjusted. Licence: https://creativecommons.org/licenses/by/2.0/

Thanks to June’s surprising referendum result, fears over how our exit from the EU will proceed and the recent plunge in sterling, shares in the some of the UK’s biggest businesses have been on something of a roll. Quite rightly, investors have looked to protect their hard-earned wealth by stuffing their portfolios with companies that earn a significant proportion of revenue from overseas. Brentford-based pharmaceuticals giant, GlaxoSmithKline (LSE: GSK) is just one example.

At the start of October, shares in the FTSE 100 stalwart went as high as 1,722p. To put things in perspective, the last time this happened was in 2013. Before that? You’ll need to go all the way back to early 2002. After such a decent run of form however, I’m starting to question whether shareholders should consider moving on. 

It’s nothing to do with today’s trading update. Indeed, the figures released by the company this afternoon should make pleasant reading for shareholders. Total sales were up 8% to £7.5bn, thanks in no small part to the performance of new pharmaceutical and vaccine products (up 79% to £1.21bn). Core earnings per share, both for the quarter and for the year to date, are up 12%. As a result, this kind of percentage growth continues to be expected for the whole year.

Time to sell?

It’s easy to understand why Glaxo is held in high esteem. Today’s update combined with the defensive, geographically diversified nature of the business, the sizeable 4.9% yield and its reasonable valuation (a forecast price-to-earnings, or P/E, ratio of just below 16, according to Stockopedia) make the shares attractive. Dig a little deeper however, and I’m not convinced everything is so rosy, at least in the near term. 

Although earnings are forecast to improve significantly next year, this will still leave dividend cover rather low at 1.23. Prospective income investors, may justifiably question whether there are safer opportunities elsewhere, especially as payouts haven’t budged since 2014. For this strategy to be effective, they really need to be growing consistently. A stagnant dividend suggests that a business is treading water. All it may take is one significant negative event to throw Glaxo’s strong recovery off-course. This could come in the form of next month’s US election.  

Assuming the opinion polls are correct (which isn’t always the case these days), Hilary Clinton will shortly be confirmed as the next president. Given her comments on excessive drug pricing, I wouldn’t be surprised to see shares in pharmaceutical companies such as Glaxo coming under pressure should she get the keys to the White House.

But there could be other, more ‘traditional’ headwinds. While it looks to be making progress in addressing the patent cliff (the recent US approval of new shingles vaccine Shingrix is undeniably positive), developing new drugs remains challenging and time-consuming. It’s also clear the new CEO Emma Walmsley will need to hit the ground running when she takes over next March. The market’s relatively muted reaction to her appointment (and to today’s trading update) suggests the share price may have reached its zenith for now.

In sum, while I certainly don’t think shares in Glaxo will crash in the near future, I’m less bullish than most about the company’s prospects over the next year or so. Sometimes, it pays to leave the party when you’re having the most fun.

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Paul Summers has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.