The list of FTSE 100 Brexit winners is far longer than anybody could have imagined, and pharmaceutical giants AstraZeneca (LSE: AZN) and GlaxoSmithKline (LSE: GSK) figure highly.
As the nation went to bed on 23 June anticipating a Remain victory, AstraZeneca closed at 3,898p and Glaxo at 1,429p. Today, with Leave a political fact of life, they trade at 4,539p and 1,656p respectively, having both enjoyed almost identical leaps of around 16%.
Pound payouts
The plunge in the pound is the major reason: both generate most of their earnings overseas, and these are worth more when converted back into sterling. AstraZeneca converts its dividends into pence on the day it posts its results and if the pound stays, low future payouts will be worth more. Glaxo’s dividend won’t grow in sterling terms with management stating that the payout will remain at 80p per share for the next few years. But the rising value of its overseas earnings should banish suspicions that its payout is unsustainable.
The sterling bounce has now been priced-in. In fact, both stocks have now yielded some of their gains as sterling sprang back into life, full of the joys of Theresa May. However, with the Bank of England almost certain to announce some stimulus next month, both AstraZeneca and Glaxo could benefit from a further decline in the value of our currency after the next monetary policy committee meeting on 4 August. Markets are pricing-in an 84% chance of a rate cut (although beware, they put similar odds on the UK remaining in the EU).
Winds of change
Brexit isn’t everything, in the longer run both companies primarily rely on their ability to generate healthy earnings. Here, the picture is mixed. AstraZeneca’s earnings per share (EPS) are forecast to drop 11% in 2016 and another 3% in 2017, marking six consecutive years of declining EPS. Loss of Crestor US exclusivity in May will also hit future results. However, currency tailwinds will help: last quarter’s 5% increase in revenues declined to just 1% at actual exchange rates but we can expect this unhappy equation to reverse.
Investors continue to take a punt on the future, gambling that chief Pascal Soriot’s promised pipeline of new blockbuster treatments will start to flow in the years to 2023. Trading at 13.9 times earnings they aren’t getting much of a discount for being so patient, although they get a generous dividend while they wait. Despite recent share price growth, AstraZeneca yields a solid 4.7%, covered 1.5 times.
GlaxoSmithKline’s dividend is marginally higher at 4.9% but cover is notably thinner at just 0.9. However, that should repair itself as earnings rise, with forecast EPS growth of 20% this year, and 6% in 2017 – and that’s before the currency kicker. Revenues have been boosted by a healthy performance from its Viiv healthcare business and positive margin progression, but there’s a price to pay for this rosier outlook, as Glaxo now trades at 21.8 times earnings, notably pricier than rival AstraZeneca.
With bond yields falling again and interest rates likely to stay lower for even longer, these near-5% dividends are too good to ignore. Glaxo looks the more solid of the two, although AstraZeneca could fly if its drugs pipeline finally starts gushing. Either way, the dividends should flow.
