The GlaxoSmithKline (LSE: GSK) share price had, at the point I checked this morning, moved precisely 0% over the past five years.
But dividends have provided a total yield of 25% as compensation. And as the shares have spent most of the period below their average level, if you’d reinvested the cash in more shares you’d have had a better overall return than that.
I reckon that’s not bad for a period in which Glaxo’s earnings went through a steep dip as it was investing heavily in its drug development pipeline.
The fruits of that research are coming through, and I don’t think the share price has yet caught up with the progress that’s been made. In its third quarter, Glaxo saw sales of £8.1bn, 3% ahead at actual exchange rates (AER) and 6% ahead at constant exchange rates (CER).
EPS growing
But more importantly, adjusted earnings per share came in 10% ahead at AER and 14% ahead at CER, with cash flow in the first nine months climbing to £2,375m from £1,668m in the same period last year. The figures represent an adjusted operating margin of 31.2%, and I see that as pretty healthy.
Glaxo is still expecting to pay 80p per share in dividends for the full year, the same return it has made for each of the past four years, and that would represent a yield of 5%. It’s around 1.4 times covered by forecast earnings and, ideally, should be covered better than that. But I expect that to come as EPS grows in the next few years, and I see a return to progressive dividends as surely not far off.
Bouncing back
Shire (LSE: SHP) has been through a very erratic period, and though its share price is up nearly 60% over five years, it’s still down from its recent peak in 2015 after a couple of years of big earnings falls — so how lucky you were with the timing pretty much determines how you’ve done recently if you hold the shares.
And there’s been precious little in the way of dividends to compensate shareholders in recent years, with yields coming in around the 0.5% level. So why do I actually like the look of Shire at the moment?
I see it as a potential recovery candidate now, even without the mooted takeover by Takeda Pharmaceutical of Japan. Shire has been recording some notable successes in its pursuit of treatments for rare diseases, and has just got the European nod for its lanadelumab subcutaneous injection, for the treatment of hereditary angioedema. And while a rare disease focus might sound like it wouldn’t result in the same sales volumes as drugs for more common ailments, a specialist could see a lot less competition and higher margins.
Too cheap?
Shire’s P/E has picked up to around the 11 to 12 level, but I can’t help thinking that Takeda’s planned $62bn deal undervalues it. Takeda itself is not having an easy time, with the firm’s founding family against the deal and the debt that it will bring — so much so that Takeda is looking to dispose of up to $10bn in assets and launch an equity issue.
I’d hold off and see how the deal goes, but if it fails I could see an attractive investment falling to a better price here.
