What You Were Buying Last Week: GlaxoSmithKline plc

One of Warren Buffett’s famous investing sayings is “be fearful when others are greedy and greedy only when others are fearful“. Or, in other words, sell when others are buying and buy when they’re selling.

But we might expect Foolish investors to know that, and looking at what Fools have been buying recently might well provide us with some ideas for good investments.

So, in this series of articles, we look at what customers of The Motley Fool ShareDealing Service were buying in the past week or so, and explore what might have made them decide to do so.

Bad news

gskLast week GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) issued a results announcement for the second quarter and interim management report for the half-year that was full of bad news.

Overall second-quarter sales fell by 13%, with revenue from its leading US respiratory product, Advair, dropping 19% over the period. The company went on to say that it didn’t expect any growth in group sales or profits in the current year, and that it was cancelling a proposed share buy-back programme, which could have been worth up to £2bn.

As if all that wasn’t enough the company remains embroiled in a serious corruption scandal in China, which has promoted bribery investigations by both the US Department of Justice and the UK Serious Fraud Office.

So what might have possessed enough people to buy shares in the British pharma giant to put Glaxo firmly into the number one spot in our  latest Top 10 Buys list*?

The long view

Well, despite all of the bad news — and there’s plenty of that — there’s still a lot to like about Glaxo. And the fact that the company is currently trading some 17% below its 52-week high may only serve to make it even more attractive. 

Firstly, as bad as the current situation is, it’s relatively short-term as far as investing goes. Sure, sales and profits may be flat this year, but investing is about the long view — what are Glaxo’s prospects five or ten years down the line? That will depend on what new products the company is bringing to the market now and what it’s got up its lab coat sleeve for the future.

It’s recently launched new products in two main therapeutic areas — Breo and Anoro in respiratory and Tivicay HIV, with uptake of the latter being described as “very strong“.  More important still, Glaxo has a pipeline of  over 40 candidate products that are now in late stage development, and says that 30 of its R&D assets have the potential to be “first class” in a range of therapeutic areas, including respiratory, immuno-inflammation, epigenetics and cardiovascular.

Rewarding shareholders

And there’s always the dividend. Consensus analyst estimates of a 77.8p payout this year, rising to 79.8p in next, put Glaxo on forward yields of 5.4% for 2014 and almost 5.6% for 2015 — way ahead of both the FTSE 100 average and its sector peers.

True, dividend cover may seem weak — it may be as low as 1.2x this year — and both earnings and free cash flow are currently under pressure. But the company seems committed to maintaining its policy of year-on-year dividend growth, and the proceeds of its divestment programme should help boost the cash available for rewarding shareholders. Plus there’ll be a substantial one-off return of cash next year, as a result of Glaxo’s recent deal with Novartis.

Finally — albeit unbeknownst to buyers last week — CEO Sir Andrew Witty dropped some heavy hints yesterday that he’d be open to a break-up of Glaxo, potentially spinning-off its consumer healthcare business (which is now effectively a Glaxo-led joint venture with Novartis) if that seemed a more profitable option. Any such action may yet be some time away, but it could unlock further value for shareholders at some point.

But, of course, whatever other people were doing last week, only you can decide if Glaxo is a buy right now.

Jon Wallis owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.

* based on aggregate data from The Motley Fool ShareDealing Service.