What You Were Buying Last Week: GlaxoSmithKline plc

gskOne of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful“. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we look at what customers of The Motley Fool ShareDealing Service were buying in the past week or so, and explore what might have made them decide to do so.

Cliff diving

The major pharmaceutical companies have had a tempestuous past few years, as their various huge revenue-generating ‘blockbuster’ products have fallen out of patent-protection, leading to the companies tumbling over what’s become known as the ‘patent cliff”.

In the case of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) , its accumulated patent expirations have certainly depressed earnings performance in recent years, and City analysts are expecting 2012’s 1% drop in earnings to be followed by a flat performance when 2013’s results are published.

Worse still, at least as far as PR goes, a bribery scandal in China last year resulted in a 61% drop in sales in that country, with Glaxo since being forced to overhaul its sales practices there.

And GlaxoSmithKline’s recent share price performance has been less than impressive — its gain of 28% over the last five years is only just over half as much as the FTSE 100‘s 51% increase.

So what, you might ask, convinced enough people to put GlaxoSmithKline in the number 5 spot in our latest “Top Ten Buys” list*?

Best pipeline

Well, it’s not all doom-and-gloom for GlaxoSmithKline. For one thing, it wasn’t as badly hit by the fall off the patent cliff as some of its competitors. In recent years GlaxoSmithKline had been diversifying away from the traditional ‘blockbuster drug’ revenue model, and has been embracing newer biotechnology-oriented avenues.

In its October 3Q update, GlaxoSmithKline reported that it had received four new approvals — for HIV, flu, cancer and asthma products — together with several positive FDA recommendations, and also that it had submitted three new filings. And it’s already received European approval for its Tivecay HIV treatment, which could prove to be a significant revenue generator.

Looking further ahead, in a report published last November by analyst-house Morningstar, GlaxoSmithKline’s product pipeline was rated the best of eleven leading pharmaceutical companies, with its potential treatments in the areas of oncology and respiratory diseases being seen as key strengths.

Of more immediate significance, GlaxoSmithKline is well on the way to delivering the world’s first really promising malaria vaccine. Snappily named ‘RTS,S’, it’s being developed in conjunction with the non-profit PATH Malaria Vaccine Initiative, underpinned by funding from the Bill and Melinda Gates Foundation, and has the backing of the World Health Organization. With positive 18 month follow-up data being reported in Q3, approval for ‘RTS,S ‘is hoped-for sometime later this year.

GlaxoSmithKline has also been disposing of what it regarded as non-core, non-global brands, pocketing £1.35bn from the sale of the Lucozade and Ribena drinks brands to Suntory in the autumn of 2013. According to GSK’s chief strategy officer, David Redfern, this will allow the company to “increase the focus” on its “consumer healthcare business”.

Inflation-beating growth

It’s hard to gainsay GlaxoSmithKline’s dividend — at 4.5% it’s comfortably above the FTSE 100 index average of 3.5%. And the fact that dividend has been increased by an inflation-beating compound annual growth rate of 6.7% since 2008 provides some reassurance that the company intends to keep growing it in the future. 

Indeed, a forecast full-year payout for 2014 of 82.3p per share, with a rise of 6.2%, to 87.4p, in 2015, suggest FTSE 100-beating dividend yields of 5% for 2014 and 5.3% for 2015. Fears that the cover will be less than the usual 2x “safety-level” can probably be safely ignored, given GlaxoSmithKline’s long record of increasing dividends, even in times of austerity.

And whilst analysts aren’t expecting any overall increase in earnings-per-share this year, growth in both earnings and dividends is anticipated over the next two years. With a forward price-to-earnings (P/E) ratio of just 13.4, GlaxoSmithKline is substantially cheaper than the FTSE 100’s 16.8 forecast. And its near-5% dividend knocks the FTSE 100’s 3.1% average into the proverbial cocked-hat.

But of course, no matter what other people were doing last week, only you can decide if GlaxoSmithKline really is a ‘buy’ right now.

Top share selections

The Motley Fool's expert analysts certainly like GlaxoSmithKline -- it's one of the five top long-term share selections featured in the Motley Fool's special report "5 Shares To Retire On".

To find out which four other great companies have been chosen, get hold of your FREE copy now.

Jon owns shares in GlaxoSmithKline . The Motley Fool has recommended GlaxoSmithKline.

* based on aggregate data from The Motley Fool ShareDealing Service