How GlaxoSmithKline plc Could Struggle To Repeat A 5-Year Gain of 57%

gskThe shares of FTSE 100 pharmaceuticals giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), currently trading at 1,618p, have surged 57% over the last five years, just ahead of the index’s 54% gain.

However, the story could change over the next five years, as GSK’s shares have the potential to advance by a less healthy 28%.

Here’s how

Big pharmaceuticals firms have suffered a double whammy over the last five years, with a spate of expiring patents on a good number of blockbuster drugs across the industry and reduced healthcare spending by governments.

GSK has weathered the storm better than many, helped by its consumer business (over-the-counter brands) and exposure to emerging markets. Nevertheless, earnings have made little headway over the last five years.

The main reason GSK’s shares have surged 57% over the period is that the market had marked the company down to a lowly price-to-earnings (P/E) ratio before the patent cliff approached; but has since re-rated the shares — the trailing P/E is now up to 14.4 — as GSK has proved its resilience and investor confidence for the future has grown.

City analysts expect earnings growth to start picking up again in the coming five years. But not at the greatest speed: the consensus is for earnings per share (EPS) to increase at a compound annual growth rate of just over 5%, from last year’s 112.2p to 143.6p by the year ending December 2018 — a total increase of 28%.

If the shares track earnings, and continue to rate on their current historic P/E of 14.4, the price will of course rise by the same 28% as EPS, putting GSK’s shares at 2,071p five years from now.

However, it’s possible market confidence could increase further yet. If GSK were to re-rate to the FTSE 100’s long-term average historic P/E of 16, we’d see the shares at 2,298p — a somewhat healthier 42% rise

Investors can also expect chunky dividends on top of any share price rise. The current historic yield is 4.8%, and analysts are forecasting dividend growth a little ahead of earnings. We’d see a total of 452p a share paid out over the period. Put another way, a £1,000 investment in GSK today would deliver £279 in dividends alone.

There’s no guarantee that earnings and dividends will play out as the analysts are forecasting. History tells us, though, that resilient businesses, such as GSK, are capable of delivering for shareholders year after year, decade after decade.

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G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in GlaxoSmithKline.