The FTSE 100 pharmaceuticals and consumer healthcare giant GlaxoSmithKline (LSE: GSK) saw a sharp fall in share price earlier in February. The price fell over 4% after the company released its 2019 results.
More than a week later, the price is still in free-fall. It was down 7.3% at the last close compared to the day before the results. It’s now at levels not seen since October.
On the face of it, there’s little not to like about GSK’s results. 2019 was another year of increases in both revenue and earnings, and the company has also improved its cashflow for the second year straight.
So why the fall? And is this a buying opportunity or a sign of worse to come?
The future of dividends
In a statement that has a direct bearing on investors’ income, GSK said “Expect 80p dividend for 2020”. This is in keeping with its dividend policy for the past few years.
At the present share price, this amounts to a dividend yield of 4.75% for the year (higher than the average for the FTSE 100). In other words, if I buy the GSK share today, my passive income from the share will be just shy of 5%.
However, in the same breath the company has also said that the expected adjusted earnings per share (EPS) is likely to decline by 1%–4%, after increasing to 123.9p for 2019. A lower EPS increases the likelihood of a dividend cut since the company needs to earn enough to provide an income to its shareholders.
As far as this bit of guidance is concerned, I’m not worried, at least for now. Even if we assume a worst-case scenario, of a 4% decrease in EPS, the number is still at approximately 119p. With the dividend per share at 80p, the dividend cover is still a comfortable 1.5 times.
What I’m more concerned about is GSK’s rising debt level, which has increased by 16.6% over the past year. In relative terms, the number isn’t all that bad.
GSK’s debt-to-equity ratio, a measure of a company’s financial health, is at 2.5 times. This is higher than other pharmaceutical peers like AstraZeneca, whose ratio is less than 1.5 times. But in the context of GSK’s own past performance, it shows an improvement.
In 2018, GSK debt-to-equity ratio was almost 6 times. This means that in one year the ratio has actually more than halved, even if the absolute amount of debt has risen. I’d keep an eye out for the company’s debt numbers, but for now my concerns are muted.
Healthy capital returns
GSK has also given healthy returns to shareholders. In 2020 so far, its share price on average is 12.3% higher than in 2019, despite the latest decrease in share price. Besides this, it offers two other important advantages. One, it’s a defensive stock, which means it’s relatively insulated from cyclical slowdowns. Two, it offers a healthy dividend yield compared to other growth stocks.
In my view, the fall in price is a chance to buy a share that offers growth and dividends.
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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. 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.