Why You Should — And Shouldn’t — Buy GlaxoSmithKline plc

Royston Wild looks at the perks and the perils of investing in GlaxoSmithKline plc (LON: GSK).

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Today I am running the rule over the investment case for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US).

More exclusivity losses on the horizon

GlaxoSmithKline, like the rest of the pharmaceuticals sector, has seen revenues growth smashed in recent years as patent losses across key products have relentlessly stacked up. Indeed, this factor is expected to have resulted in an 13% top line decline when 2014’s results are wheeled out next month, and City analysts do not expect sales to reach last year’s levels until 2017 at the earliest.

The business is due to lose exclusivity on its blockbuster Advair asthma treatment midway in 2016, a drug which is responsible for 27% of total revenues, while the devastating effect of patent losses is also smashing takings for Lovaza, Seroxat and Valtrex amongst others — turnover across its so-called ‘Established Products’ shot 17% lower during January-September. GlaxoSmithKline can only expect sales here to keep rattling lower as its rivals step up to the plate.

Research activity keeps on rolling

Although it could be argued that GlaxoSmithKline has been late to address the effect of crumbling patents, the company is chucking vast sums into organic R&D to mitigate this effect and create the next generation of earnings generators for the next five to ten years. The firm has around 18 products in Phase III testing at present, and has a better-than-average record of meeting regulatory requirements and getting product to market.

On top of this, GlaxoSmithKline also has the means to hoover up its pharma peers and make selective purchases in key growth areas. Indeed, the business is in the process of swapping its oncology operations for Novartis’ vaccines division, a move which will add terrific value to GlaxoSmithKline’s market-leading position in the respiratory and HIV sectors.

Chinese scandal continues to weigh

Investors breathed a sigh of relief in September when GlaxoSmithKline agreed to shell out £297m to settle a long-running corruption investigation with China, a matter which saw the drugs giant’s sales in the country fall off a cliff and resulted in the humiliating imprisonment and then deportation of regional chief Mark Reilly.

However, those expecting a rapid sales rebound in this crucial emerging market look set to be disappointed. Indeed, local media outlet Caixin reported this week that the business is about to slash a further 1,000 people from its workforce there, following the sacking of hundreds of sales agents in previous months. GlaxoSmithKline has plenty of work to repair the damage of its previous misconduct and get revenues moving higher again.

Dividends predicted to pound higher

Even though GlaxoSmithKline’s earnings outlook remains insipid at best, the company’s vast capital pile is expected to keep dividends ticking higher in the near term. The drugs play has shrugged off severe earnings volatility in recent years to keep the payout marching skywards and trump the market average.

And the City does not see this trend ending any time soon, with a predicted total payout of 80.1p per share for 2014 anticipated to rise to 80.6p in 2015 and to 80.8p in 2016. Consequently GlaxoSmithKline carries a monster yield of 5.4% through to the close of next year.


Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK 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.

More on Investing Articles

Two gay men are walking through a Victorian shopping arcade
Investing Articles

The Burberry share price continues to rise despite falling sales!

Our writer looks at how the Burberry share price responded to the company’s first-quarter trading update, which was released earlier…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

What a crazy day for the share price of this FTSE 250 retailer!

Our writer’s taken time to digest the latest results of the FTSE 250’s Frasers Group. And he likes what he…

Read more »

Black woman using smartphone at home, watching stock charts.
Investing Articles

1 year on from the CrowdStrike IT outage, here’s how the S&P 500 stock has done

S&P 500 stock CrowdStrike tanked last year when the company caused a huge global IT outage. Its performance since then…

Read more »

Mixed-race female couple enjoying themselves on a walk
Growth Shares

Aiming to turn £10k into £20k? Here are 3 FTSE 250 shares for investors to consider

Our writer demonstrates how three vastly different FTSE 250 stocks could all double an investment over a decade – and…

Read more »

Burst your bubble thumbtack and balloon background
Investing Articles

The unanswered billion-dollar question hanging over the Helium One share price!

With the Helium One share price stuck around 1p, our writer tries to answer the question that he reckons every…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

Is the FTSE 100 becoming increasingly disconnected from the UK economy?

The FTSE 100's broken through the 9,000 barrier for the first time, yet the British economy's shrinking. Should investors be…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

I’ve just invested £12.06 in this FTSE 250 stock

Why has a FTSE 250 housebuilder that Stephen Wright's been watching for some time suddenly jumped to the top of…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

Why I think the FTSE 250 could outperform the FTSE 100 this decade

Our writer takes a lesson from history and outlines why he thinks the FTSE 250 could beat the FTSE 100…

Read more »