Half-time news that, on a constant-currency basis, turnover is down 7%, operating profit down 10% and earnings per share down 14% so far this year won’t cheer shareholders of pharmaceutical giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).
Lower sales in the US and Japan, and a decline in the firm’s established products sales quashed pockets of growth in places such as emerging markets and Europe, say the directors. So how does this affect GlaxoSmithKline’s ability to pay the dividend?
A good dividend record
City analysts following the firm reckon GlaxoSmithKline will pay a dividend around 84p for 2015. At today’s share price of 1509p, the forward dividend yield is running at close to 5.6%. Earnings, they reckon, will cover the payout about 1.3 times, which seems comfortable.
The company has a good record of dividend growth:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
| Dividend per share | 61p | 65p | 70p | 74p | 78p |
Despite the earnings’ wobble in the first half of this year, cash generation is good at GlaxoSmithKline, and it’s the cash that pays the dividend, not earnings on a profit & loss statement:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net cash from operations (£m) | 7,841 | 6,797 | 6,250 | 4,375 | 7,222 |
Capex for maintaining operations and investing in new growth, such as the development of new drugs, competes with the dividend for the firm’s cash flow. To put things in perspective, last year, dividend payments cost GlaxoSmithKline around £3,918 million. So, assuming that this year’s cash flow isn’t down there should be ample cash flow to service the dividend.
Turning around?
Things haven’t been easy for big pharma in recent years. GlaxoSmithKline has been fighting to turn its fortunes around and aims to diversify its business, create more value products, and to simplify its operating model. Revenue figures were flat in 2012 and in 2013 and, judging by the half-time result, look set to be down in 2014.
A flurry of generic competition drove down selling prices for some of the firm’s best-sellers after they timed-out on exclusivity. But that’s not the only challenge; even drugs under patent protection face competition from cheaper producers’ alternatives. As salvation, the CEO nods towards the firm’s new products in the areas of Respiratory and HIV, and a deal with Novartis, as evidence of progress developing new lines of business.
On balance, GlaxoSmithKline seems to be holding its own on cash generation, which makes the dividend look secure, at least for now. Perhaps the yield is worth collecting while we wait for the next generation of blockbusting best-seller drugs to gain traction.
What now?
GlaxoSmithKline trades on a forward P/E rating of around 13.5 for 2015, a year that City analysts predict an 8% bounce back in earnings.
