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How did FTSE 100 dividend stock GlaxoSmithKline get to be so risky?

For years, pharmaceutical giant GlaxoSmithKline (LSE: GSK) was one of the most admired shares on the FTSE 100, appreciated for its steady growth and strong income prospects. Now it trades 8% lower than five years ago and today’s second-quarter results highlight the scale of the task facing boss Emma Walmsley. Plenty of investors still love this high-yielding FTSE 100 favourite, though.

Jab happy

The good news is that Q2 sales rose 4% at constant exchange rates to £7.3bn, bolstered by a strong showing from its vaccines division. Underlying operating profits of £2.1bn are up 7%, helped by lower R&D spend. To nobody’s surprise, the quarterly dividend is unchanged at 19p, with the full-year payment expected to total 80p, the same level as in the last four years.

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Investors were content, with the stock up 1.2% after the announcement. However, I do worry that growth is driven by a relatively small number of star treatments, with HIV treatments Tivicay and Triumeq, accounting for more than a quarter of pharmaceutical revenues.

Strong arm

Its Vaccines arm’s strong performance was largely down to new shingles vaccine Shingrix, which sold £167m in the quarter with 2018 sales expected to range between £600m and £650m. Its success helped boost sales in this division by 16%, against 1% in the pharmaceutical division and 3% from healthcare.

Analysts have been warning of a Glaxo patent cliff for years, and it is still looming. Cash cow Advair still does not have a generic competitor but that cannot be far away. This does make it a rather strange time to cut R&D spend. However, it currently boasts more than 40 new molecular entities in its pharmaceutical pipeline. A major restructuring programme is expected to deliver annual cost savings of £400m by 2021.

Collaborative effort

Most of the attention focused on the accompanying statement, which unveiled an exclusive four-year collaboration with 23andMe to develop innovative new medicines and potential cures, using human genetics as the basis for discovery, and calling on 23andMe’s large-scale genetic resources and advanced data science skills.

There has been talk of hiving off Glaxo’s consumer healthcare business, but so far Walmsley has been quiet and that does make you wonder whether she is grateful for the ballast it brings. Being a pureplay developer drug can certainly be risky. The other concern about breaking up its business is that it could threaten the hallowed dividend. She has some tough calls to make.

Let it flow

Glaxo currently yields 5.1%, with cover of 1.4. Progression is likely to be minimal for the next few years, but Walmsley is probably right to focus on giving investors jam tomorrow, provided she does not stretch their patience too far. Management now expects 2018 adjusted earnings per share growth of 7% to 10% at constant exchange rates, provided no US generic competitor to Advair appears in 2018. Investors and the board know it will come at some point, though.

Today’s numbers were healthy enough and the 23andMe hook-up is interesting, but everything now depends on that pipeline. High-yield dividend star or dangerous dog of the FTSE 100? The jury is still out.

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harveyj has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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