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GlaxoSmithKline plc Pleases The Market With New Strategic 5-Year Plan

GlaxoSmithKline (LSE: GSK) released its results for the first quarter today and the company also issued a strategic update. 

First-quarter revenue increased marginally year on year to £5.62bn from £5.61bn. Core operating profit declined by 15% in real terms to £1.3bn. Unfortunately, these results came in slightly below analysts’ expectations. However, while Glaxo’s results disappointed, the company’s new strategic five-year plan has won the praise on analysts. 

Updated plan 

In a statement released today, Glaxo announced that group revenue is expected to grow at a compound annual growth rate of “low-to-mid single digits” over the five years from 2016 to 2020. Over the same period, core earnings per share are expected to expand at a rate in the “mid-to-high single digits”.

Unfortunately, while earnings are set to expand rapidly from 2016 onwards, the company expects 2015 core earnings per share to decline at a percentage rate “in the high teens” as sales of key drugs continue to fall. 

Still, the group is on track to achieve annualised cost savings of £3bn by the end of 2017. These savings will help the company maintain its dividend payout at 80p per share for each of the next three years — that’s a yield of around 5.3% at current prices. 

Glaxo also announced today that it was scrapping the plan to partially spin off its HIV drugs business, ViiV Healthcare — a joint venture with Pfizer — due to an “updated strong positive outlook”. 

Bad news

Today’s update from Glaxo was broadly positive but the company did disappoint on one front. In particular, Glaxo announced today that it was planning to scale back its planned cash return to shareholders following its asset swap deal with Novartis.

Glaxo’s £13.1bn asset swap with Novartis saw the group sell its cancer drugs portfolio to Novartis, while buying Novartis’s vaccines and at the same time boosting its consumer health business through a joint venture with the Swiss company.

Glaxo had previously stated that it was planning to return £4bn to investors following the deal, but this has now been scaled back to £1bn and will be paid alongside the fourth quarter dividend. 

Sir Andrew Witty, chief executive of GSK, said:

“…our operating environment is shifting radically, particularly in relation to pricing and that we must be prepared for specific uncertainties…”

“…with the substantial growth and synergy opportunities we have going forward, we are today setting out to shareholders our expectations for the Group over the medium-term and announcing a series of decisions which support delivery of this performance and future shareholder returns.”

Rosy outlook 

While it’s disappointing that Glaxo has decided to scale back its cash return to investors, today’s strategic update from the company is full of good news.  

Glaxo has laid out its expectations for the medium term, removing a certain amount of uncertainty surrounding the group’s future prospects. Now, management has made a commitment to the company’s dividend for the next three years and management is predicting steady growth from 2016 to the end of the decade. There are few other companies that provide such a long-term outlook.

Still, with earnings set to decline by a double-digit percentage this year, investors will have to ride out some volatility before Glaxo returns to growth.  

Nevertheless, with Glaxo's internal forecasts predicting strong, steady earnings growth through to the end of the decade, the company will make a great buy and forget investment. In fact, Glaxo's figures have convinced our analysts that the company is one of the "5 Shares You Can Retire On"! 

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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.