I’m shopping for shares right now, should I pop GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) into my basket?
Cold comforts
When stock markets caught a cold in May, I suggested GlaxoSmithKline would be the perfect pick-me-up for your portfolio. I had faith in Glaxo, but now it stands accused of bribing Chinese doctors and officials to use its medicines and has just posted a double-digit drop in operating profits. Should I still buy it?
If Glaxo is a great British company, it may be time for some national introspection. The pharmaceutical giant was already under investigation by the OFT for allegedly abusing its dominant market position over antidepressant treatment Seroxat, a charge Glaxo denies, when the China crisis blew up. Several senior executives have been arrested, without formal charges. The aggression of the Chinese authorities has shocked everybody. Chief executive Sir Andrew Witty’s decision to delegate the problem to senior manager Abbas Hussain has surprised many, who worry that he has failed to grasp the scale of the reputational threat.
The drugs do work
Combined with an underwhelming set of Q2 results, Glaxo doesn’t look so invigorating right now. Group turnover did increase by 2% at constant exchange rates, but operating profits fell 13%. Europe is a worry, as austerity-stricken governments look to cut healthcare spending and find cheap generic alternatives. Generic competition also hit sales in Japan. So is this the time to wean your portfolio off Glaxo?
You know the answer to that one. Glaxo remains a great core holding. Its current yield of 4.4% zaps the FTSE 100 average of 3.48%. Management hiked the Q2 dividend by 6% to 18p, and is targeting total share repurchases of between £1bn and £2bn this year, which should support the price. It is also cutting costs and dropping its non-core holdings, and there is talk of AG Barr lining up a £1 billion bid for its consumer brands Lucozade and Ribena. Best of all, Glaxo looks like it is building up a healthy drugs pipeline, which should drive future sales and profits.
Just the Glax, man
Glaxo’s share price is up 44% over three years (against 24% for the FTSE), 23% over two years (against 11%) and 17% over the past 12 months (against 18%). So investors have enjoyed steady, index-beating growth, as well as that yield. This kind of performance doesn’t come cheap, and Glaxo is trading at 15 times earnings, against 13.31 for the index as a whole. Operating margins of 20% and ROCE of 60% suggest a company in rude health. As does forecast earnings per share (EPS) growth of 3% this year and 9% in 2014. China is only a small part of the Glaxo operation, around 4%, but I suspect it could still do a disproportionate amount of damage. If that throws up a buying opportunity, take it. You won’t get many with a company like this.
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> Harvey owns shares in Glaxo.
