Everybody likes a bit of novelty, including investors. It’s all too easy to overlook the old reliables, the ones that have delivered wealth year after year, especially when share price performance gets a little patchy. So have you forgotten just how good these two portfolio stalwarts really are?
Pipeline flows
Nobody expects pharmaceuticals giant GlaxoSmithKline (LSE: GSK) to be a share price growth machine, but recent performance has still been patchy. The share price is down 12% on three years ago, due to the Chinese bribery scandal, cliff-edge patents and drying drug pipelines. The last two are particularly concerning because Glaxo needs to keep the cash flowing to maintain its generous dividends.
This week’s Q1 results showed group sales up 8% to £6.2bn and core earnings per share (EPS) also up 8% to 19.8p. Glaxo has done well to wean itself off its dependency on lucrative respiratory treatment Advair/Seretide, which has seen sales fall 30% since 2013. Growth of new products in its respiratory portfolio offset about 70% of that decline in the first quarter, with signs of progress in other core therapy areas of HIV, oncology, immuno-inflammation and rare diseases.
Dividend safety remains a concern but management is standing by its plans to pay an annual ordinary dividend of 80p in 2016 and 2017. Its Q1 interim dividend was 19p per share, in line with Q1 2015. The current yield is a generous 5.4% and although cover looks thin at 0.9 I’m reassured by optimistic EPS growth forecasts of 14% this year and 5% in 2017. With new product sales growing fast to make up 20% of total pharmaceutical sales in Q1, the dividend looks more robust than it did. The share price is up 7% in the last month as investors realise that Glaxo is too good to be forgotten.
Springtime for Vodafone
Nobody expects Vodafone Group (LSE: VOD) to be a share price growth machine either, but it’s still up 30% over five years. Management has done well to keep the momentum going given wider economic troubles in core European markets such as Italy and Spain (where sky-high unemployment has impoverished the youth market), and its cash-hungry £20bn Project Spring network improvement programme. Faster growth in Turkey, South Africa and India has offset some of its European troubles, vindicating its global diversification, while Project Spring is almost complete.
Group organic service revenues have now grown for six consecutive quarters and its planned move into quad-play mobile, broadband, cable TV and fixed line services should provide a new growth opportunity. Chief executive Vittorio Colao has promised a small set-top box with rapid switching of channels and menus. But this is a competitive area, with BT, EE, SKY, TalkTalk and Virgin Media already joining battle.
Vodafone now yields 5% with cover of just 0.5. This costs it around £3bn a year and dividend progression is likely to be limited. EPS are forecast to drop 11% this calendar year but thereafter things look more promising, with forecast growth of 23% in 2017 and 29% in 2018. If correct, the dividends should continue to follow, reminding investors why they bought Vodafone in the first place.
