Is GlaxoSmithKline (LSE: GSK) borrowing money to pay for your returns?
Right now I'm trawling through the FTSE 100 (UKX) and checking for blue chips that have had to take on extra debts to help fund their dividends and buybacks.
Today I'm looking at GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) to see if its 'shareholder returns' have been at the expense of the balance sheet. I've extracted the following statistics courtesy of S&P Capital IQ:
| Year to 31 December | 2007 | 2008 | 2009 | 2010 | 2011 |
|---|
| Net debt issued/(repaid) (£m) | 4,869 | 2,416 | 1,208 | (1,335) | (1) |
| Dividends paid (£m) | (2,793) | (2,929) | (3,003) | (3,025) | (3,406) |
| Net shares issued/(repurchased) (£m) | (3,244) | (3,654) | (1) | 63 | (1,932) |
| Total cash retained/(spent) (£m) | 1,640 | 1,400 | 933 | (339) | (189) |
While annual cash flow movements can provide some insight into how a business has performed, I reckon looking back over several years provides a better view of possible potential problems with the funding of dividends and buybacks.
So between 2007 and 2011, my stats tell me GlaxoSmithKline paid out aggregate dividends of £15.3 billion and spent a net £8.8 billion on share buybacks.
However, to help fund that expenditure, a net £7.2 billion was taken on as additional debt. My numbers also show total cash retained in the business after all expenses and payments (and adjusted for currency movements) was £2.5 billion during those five years.
As such, I reckon GlaxoSmithKline effectively increased its net debt by £4.7 billion between 2007 and 2011 to help pay for total dividends and buybacks of £24.1 billion.
While other expenditure, such as acquisitions, may have prompted GlaxoSmithKline to take on that additional debt, a business cannot keep on borrowing extra money forever to help fund dividends and buybacks. As we saw in the banking crash, such 'shareholder returns' are discretionary and these days I prefer them to be paid entirely through annual cash flows.
Furthermore, I like to see companies use their cash flows to pay off their debts, rather than spend more than they earn and have to take on extra borrowings. That way there is less financial risk to any investment.
All told, I feel these cash flow numbers from GlaxoSmithKline do not indicate obvious or immediate trouble, but they are certainly something to monitor if you're a shareholder, just in case.
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> Maynard does not own any share mentioned in this article.
