Glaxo's latest figures didn't sparkle but its shares still look way too cheap.
Changing hands at around £20 a decade ago, shares in GlaxoSmithKline (LSE: GSK) have serially disappointed investors who bought into the merger logic that brought the business into being. By 2003, the shares had slumped to around 1,200 pence, a level that they have fluctuated around ever since.
Yet investors -- like me -- who have bought into the business at that level have little to complain about. Yielding 5.1%, the shares are an income investor's dream, throwing off cash and dividends aplenty.
Legendary fund manager Neil Woodford is a fan. Last October, he revealed that he'd been selling his massive holdings in BP (LSE: BP) and Royal Dutch Shell (LSE: RDSB), and putting the freed-up cash into pharmaceutical businesses -- specifically, GlaxoSmithKline and AstraZeneca (LSE: AZN).
His logic? "When I switched out of BP to GlaxoSmithKline," he explained, "I could do so on the same yield from a company that was not covering its dividend, to one that covered it two times over with cashflow." Prescient words -- especially in light of subsequent events.
Half-year news
But at first glance, today's results, covering the second quarter -- and therefore the first half of the year -- are a decidedly mixed bag.
First, the good news:
- Half-year revenues up 6%
- Second-quarter dividend up 7% to 15 pence per share
- Half-year operating cash inflow up 21% to £4.2 billion
- 'White pills/ western markets' accounted for 26% of sales in the second quarter, down from 31% in the same period last year
- Three new drugs received approval
- One new drug filed for approval
- Five new drugs progressing to Phase III development
But not all the news was as positive.
- Second-quarter US sales down 13%
- Overall second-quarter sales, excluding pandemic products, down 2%
- Second-quarter loss of £304m, thanks to major restructuring costs and a £1.57 billion legal charge
- Half-year eps down 42%
The restructuring costs relate to the US sales force, and to the closure of some R&D facilities. The legal charge primarily relates to well-flagged claims regarding the company's antidepressant drug Paxil, and its diabetes drug Avandia.
Am I worried?
In a word, no. Businesses rarely come more defensively positioned, and the company is at pains to stress how it continues to broaden its sales and product base at the same time as it makes progress in 'de-risking' its operations.
Glaxo, in short, is the world's second largest pharmaceutical company, employing around 99,000 people in over 100 countries, and manufactures almost four billion packs of medicines and healthcare products every year. Every minute, apparently, over 1,100 prescriptions are written for GlaxoSmithKline pharmaceutical products.
What's more, it is also a consumer business with a robust collection of strong brands: Ribena, Horlicks, Lucozade, Aquafresh, Sensodyne, Panadol, Tums, Zovirax -- and of course, the Macleans range of toothpaste, mouthwash and toothbrushes.
Every day, according to GlaxoSmithKline's website, more than 200 million people around the world use a GlaxoSmithKline-branded toothbrush or toothpaste, while every year the company's factories churn out nine billion Tums tablets, six billion Panadol tablets, and 600 million tubes of toothpaste.
Bottom line
Investors who bought into Glaxo a decade ago are still nursing hefty losses. Investors who bought into the business from 2003 onwards have seen only modest capital growth, if any.
But equally, it's still a business that's in transition, and which pays investors handsomely while they wait for that transition to be complete.
Yielding 5.1%, and trading on a P/E of around 10, I reckon that shares in this global healthcare and consumer products giant are a screaming buy.
More from Malcolm Wheatley:
Malcolm holds shares in GlaxoSmithKline and BP.
