To have and to hold
A year or two back, private investors couldn’t get enough of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). You could feel the love on the Fool website, as we fell for its steady growth prospects and solid income stream. Sometimes it felt like we were married to the stock. We swore we would stick with it for better, for worse, for richer, for poorer: but primarily, for better and richer. Yet somehow, the magic seems to have gone. Can it shine again?
Investing in Glaxo feels rather like a marriage. After the initial thrill, it can be a bit of a slog. But you stick with it, in the hope you’ll get there together in the end. Share price growth of just 28% over the last five years, less than half the 64% returned by the FTSE 100, has persuaded many investors to have second thoughts. Yes, they also get fringe benefits, such as that 4.5% yield, comfortably above the index average of 3.5%, but there hasn’t been too much fun lately. Pharmaceuticals is a tough business to be in (just ask rival AstraZeneca), with lurking dangers such as dry pipelines, patent cliffs and late-stage drug failures, all of which have menaced Glaxo to a greater or lesser degree.
In good times and in bad
Glaxo’s admirers were shocked and dismayed to discover it was playing fast and loose on foreign shores. The Chinese bribery scandal sparked a 61% drop in sales in the country. Glaxo has since been forced to overhaul its sales practices, which included paying doctors to promote its drugs, and sever the link between sales representative pay and the number of prescriptions written. It is about time questionable practices such as paying doctors to attend sales conferences were scrapped. There is a similar move in the US. Glaxo shouldn’t suffer too much, provided the rules are applied with equal force to all companies. Otherwise it could face a competitive disadvantage.
Marriage has its ups and downs. Glaxo’s last set of quarterly results showed a 1% rise in group sales, £1.35 billion in the bank from its sale of Lucozade and Ribena, and four new drug approvals. On the downside, there was bribery in China, troubles in Europe, and the expiry of drug patents. But that’s how it is, when you stand by a stock for the long-term. I never planned to have a quick fling with Glaxo, like most investors, I was committed to the company. And I still am.
Till death do us part?
I’ve held Glaxo for so long, I might as well call it “the missus”. But she still retains the capacity to spring surprises. The share price is up 16% in the past 12 months, surpassing the 11% growth on the FTSE 100. Earnings per share growth was flat in 2012 and 2013, but forecast to hit 6% this year and 10% in 2015. That would put the yield on a forecast 5.5%. In sickness and in health, loyal investors should find there is still plenty to love about Glaxo.
