FTSE 100-listed pharmaceutical giant GlaxoSmithKline (LSE: GSK) has long been the go-to stock for investors wanting a stable, long-term income stream. But there’s no question about it, enthusiasm has abated in recent years.
The dividend is still there but it’s been frozen at 80p for the last five years, as management looked to pour its money into R&D to get its once-mighty drugs pipeline flowing again. There’s no respite this year, with City analysts expecting the payout to fall slightly to 79.97p, both in 2019 and 2020.
Yet that’s no reason to shun this £77bn giant, which still offers a healthy forecast yield of 5.2%, beating the FTSE 100 average of 4.4%. Cover is a relatively healthy 1.4. The group’s return on capital employed is also a dizzying 64%.
Glaxo’s stock is even available at a tiny discount, currently trading at 14 times future earnings. Yet it doesn’t completely convince, with earnings forecast to fall 8% this year, although it’s slated to return to growth in 2020. Analysts are expecting the firm to report a net profit of £5.6bn for 2019, which would be a six-year high.
Buy and hold
That’s the short-term stuff. In the longer run, I believe a good portfolio is made up of stocks like these, or should at least have exposure to them.
Healthcare is a terrific long-term theme as the global population ages – the sector was the best performer on the S&P 500 in 2018. Glaxo’s revenue and profits both look set to grow strongly in 2020 and, fingers crossed, it will be lift-off after that. Now may be a good time to get stuck in while it’s still relatively cheap.
Now here’s a very different pharma. Investors in inhaled drug device development specialist Vectura Group (LSE: VEC) have seen the stock lose more than half its value in the last couple of years.
Today, the £466m firm issued its 2018 preliminary results, but the market is underwhelmed. The stock is down 2.5% at time of writing, despite a 8.4% rise in full-year reported revenue to £160.5m, while inhaled portfolio revenues jumped 15% to £131.1m.
R&D costs of £55.5m were at the lower end of guidance as it refocuses its portfolio prioritisation and boosts R&D productivity. Adjusted EBITDA rose 51.2% to £39m, “driven by revenue growth, improved gross margin, lower R&D costs and productivity improvements.” However, it posted an operating loss of £105.4m, after ongoing amortisation and exceptional items, as it continues to take a hit from its disappointing phase III study of VR475 asthma drug-device combination.
Vectura did generate strong cash generation from operations, up 30.5% to £35.1m. This left it with closing cash and cash equivalents of £108.2m, while it also completed a £13.8m share buyback.
The pharma and biotech group is tilting at an airways diseases market that’s worth $40bn globally, but hasn’t fully recovered from a series of disappointing trading updates. Its share price slump has left it trading at 15.5 times earnings, which may tempt some. Earnings fell 53% in 2017, but are up 8.4% today, with 4% growth anticipated for 2019, and then 22% in 2020. The future looks brighter, but I’m still struggling to recommend it.
Harvey Jones 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.