When I think of pharmaceutical company GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company attractive as an investment proposition.
1. Turnaround potential
Overall, GlaxoSmithKline’s revenue figures were flat in 2012 and in 2013, and look like being flat again in 2014. The embattled pharmaceutical giant has been up against a tidal wave of generic competition in all markets, which drives selling prices down. Older products that time-out on exclusivity are often best-sellers and stalwarts of the firm’s revenue and cash flow generation. So, it’s no surprise that the financial figures have been suffering. However, even drugs under patent protection face competition from other producers’ alternatives. On top of that, revenue has collapsed in China, where the company is under the regulatory spotlight for misconduct.
Such lacklustre financial performance has driven Glaxo into refocusing on core activities and cost cutting, and the CEO reckons that 2013 was a good year for research and development (R&D). So, the firm is fighting back and, going forward, new product launches could re-ignite growth. City analysts following the firm expect earnings to grow by about 8% during 2015.
As the firm focuses on launching its new pipeline, it is also selling off non-core assets and parts of the business capable of realising shareholder value. For example, the recently announced sale of the Lucozade and Ribena brands to Suntory and the sale of Arixtra and Fraxiparine, for a combined £2.05 billion return. Such moves keep the cash flowing, which makes me optimistic about continuing dividend progression. The forward dividend yield is running around 5.2%, which isn’t a bad return for patient investors prepared to give Glaxo the benefit of the doubt about its future turnaround and return to growth.
2. Consumable products
The great thing about Glaxo’s products is that they fall under the category of Consumables: people buy them, use them up, and buy them again, over and over. Such characteristics can lead to consistent and predictable cash flow, which is great for supporting a dividend payment policy. There’s an added bonus with pharmaceuticals, though: unlike washing-up liquid or similar consumables, people rarely skip a repeat- purchase because, say, the budget is a bit tight. When people need medicines, they need them.
Such rock-solid repeat-purchase credentials are why investors flock to the pharmaceutical companies for steady dividend income. With the prospect of growth returning, the shares are all the more attractive.
What now?
GlaxoSmithKline’s turnaround potential combines with its cash-generating credentials to create an interesting investment proposition.
