I’ve been willing to give pharma giant GlaxoSmithKline (LSE: GSK) the benefit of the doubt over the years. While GSK shares have remained stuck within the trading range of 1,000p–2,000p for over two decades, the dividend stream has remained rewarding for those owning the stock.

Does confirmation of a forthcoming cut to the payout change things? Here’s my take.

Wait – the dividend’s being cut?!

That’s the plan. Let’s briefly recap yesterday’s news. It was announced Glaxo would list its consumer healthcare business as a separate company in the middle of 2022. By doing this, the FTSE 100 member aims to generate cash to use for developing drugs at its pharmaceutical business (New GSK). The latter has struggled in recent years due to a wobbly pipeline. Clearly, the global pandemic hasn’t helped either. Glaxo said it was now aiming to grow sales here by more than 5% a year to 2026. 

In line with this plan, Glaxo announced yesterday that its big-but-stagnant annual payout would be cut. In 2022, the aggregate dividend from GSK and the now separate New Consumer Healthcare business will likely be 55p. That’s a little over 30% lower than the amount investors currently receive (80p). From 2023, New GSK will pay 45p per share to holders. 

While this cut is far from insignificant, it’s less than analysts had feared. This may explain why the GSK share price reacted favourably to yesterday’s news, at least initially. Unfortunately, this buying pressure gradually dissipated as the day went on as investors digested the news.

So, would I buy GSK shares now?

On the one hand, I do see some upside. Historically, many spin-offs tend to have done well once they’ve been released from the shackles of their parent companies. Considering the strong brands it shares with Pfizer (Sensodyne toothpaste, Advil painkillers), I’m can instantly think of worse firms to be invested in than New Consumer Healthcare.

Owning shares of both businesses in such defensive sectors might also be prudent if (and that’s a big ‘if’) markets become increasingly choppy as inflation fears grow. Moreover, GSK shares look good value relative to peers at 14 times forecast earnings. And while a dividend cut is never good news for income investors, the payouts should still be attractive enough. 

On the flip-side, I do understand why some existing holders may be mulling over whether to sell. Yes, the pandemic has proved disruptive for most businesses. Nevertheless, the GSK share price hasn’t fared well under CEO Emma Walmsley’s leadership.

Sure, earnings targets provide clarity and sound great on paper, but I’m sceptical over whether the new strategy can really be achieved under the current management team. Drug development can also be a painfully slow process, regardless of who’s in charge and how much money is thrown at it.

Bottom line

Time will tell whether those owning GSK shares are truly willing to embrace the new strategy. If I already held the shares, I’d probably keep holding for the income they generate and hope dividends would rise in time.

If I favoured capital growth over income and didn’t already own the stock however, I’d certainly take the time to look at other opportunities. Today’s rather muted opening suggests I’m not the only one to think that greater gains can be achieved elsewhere. 

The post GSK shares: should I buy now? appeared first on The Motley Fool UK.

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Paul Summers has no position in GlaxoSmithKline. The Motley Fool UK 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.

GSK shares: FTSE 100 laggard

Based purely on the performance of its share price over the last five years, it’s tempting to give GlaxoSmithKline a ‘hard pass’. GSK’s value is now 10% lower than it was in April 2016. It’s also been one of the worst shares to own in the FTSE 100 over the last year.

Considering the recovery seen in markets since the 2020 crash — not to mention Glaxo’s status as the biggest producer of vaccines in the world — this is quite some ‘achievement’. Then again, the fact that the company hasn’t come up with a Covid-19 vaccine so far hasn’t gone down well. It also helps to explain why shares in peer Astrazeneca have soared. 

On top of this, there’s a distinct possibility that GSK will be forced to reduce its dividend payouts going forward to free up cash to invest in its drug development pipeline. This makes complete sense, but it’s not what those who own the shares for their dependable income want to hear. In fact, it underlines the point that no investment is ever devoid of risk.

So, why are Hargreaves Lansdown investors suddenly interested?

Activists assemble

It all seems to be down to recent news that activist investor Elliott Management has declared a multi-billion pound stake in GSK. Activist investors tend to get the market excited because they can be a catalyst for change at a flagging company.

US-based hedge fund Elliott certainly has form when it comes to ruffling feathers. It previously pushed for change at Premier Inn owner Whitbread and had a few bruising encounters with FTSE 100 miner BHP Group.

Of course, whether its involvement leads to a seismic change of strategy remains to be seen. It certainly comes at an interesting time given GSK’s plan to list its consumer healthcare business as a separate entity next year. There’s always a chance that its involvement could make things worse.

Regardless, I think there are reasons to be positive about GSK shares. 

Defensive play

For one, demand for Glaxo’s products, such as the highly successful shingles jab Shingrix, should recover once the pandemic has passed. A host of new launches are also expected over the next five years.

In addition, there’s a lot to be said for buying highly defensive shares now. With markets around the world looking frothy once again, any wobbles will likely be felt most in hyped growth plays, not stock-for-all-seasons Glaxo. Even if markets were to continue rising, it’s quite possible that companies offering value will be the ones to thrive.

Moreover, I think those dividends are worth grabbing. A likely 80p per share return for 2021 gives a yield of 6%. If the payout is reduced by 20% in 2022 (the consensus forecast), the subsequent 4.8% yield is still very decent.

And then there’s the price. At 13 times forecast FY21 earnings, I think Glaxo offers great value.

Bottom line

GSK shares have been in the doldrums for a long time and perhaps justifiably so. It remains a contrarian bet for now.

Notwithstanding this, I’d be comfortable buying GSK shares at today’s price. As with investing in general, patience is key.

The post Hargreaves Lansdown investors are buying GSK shares. Should I? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline and Hargreaves Lansdown. 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.

What caused this explosive growth? And should I be adding the stock to my portfolio? Let’s take a look.

What does Omega Diagnostics do?

The company operates within the healthcare industry. It provides a wide range of in-vitro diagnostic products used throughout hospitals, clinics, and laboratories. These products are manufactured by the company’s three main divisions.

The first and largest is Food Intolerance. This segment generates around 93% of the firm’s total revenue. And as the name suggests, it focused on developing tests that identify individuals’ food intolerances as well as any health problems related to the gut.

The second division specialises in allergies. It only generates around 4% of revenue but offers an essential service used almost every day in hospitals. The company manufactures allergy assay reagents. Put simply, these reagents try to trigger a mild reaction from the body’s immune system to determine whether someone is allergic to something.

The final and smallest division is Omega’s infectious diseases department. It provides a range of CD4 tests that aid in managing patients with a pre-diagnosed HIV infection. However, recently, the firm has adapted its technology to produce antibody tests for Covid-19.

Why did the Omega Diagnostics share price explode?

From what I can tell, Omega’s initial surging share price stems from its promise of developing five different Covid-19 tests in the early days of the pandemic. This momentum has only continued since the company signed a new contract with the UK government.

Omega Diagnostics will provide approximately two million lateral flow devices per week for rapid Covid-19 testing under the agreement. Needless to say, this is a fantastic opportunity for the business, and its managers have said they expect the deal to make a significant contribution to overall performance in 2021.

Risks to consider

The company is a well-established global provider of diagnostics tests. Yet despite this, it’s still unable to make itself consistently profitable and has become somewhat dependent on external funding. Fortunately, the balance sheet is reasonably debt-free and so debt financing is an option for the future, although this could damage its financial health.

Something else to consider is the healthcare industry in general. Much like pharmaceuticals specifically, it’s one of the most heavily regulated sectors in the world. Therefore, there’s no guarantee that new products will receive regulatory approval or be economically viable even if they do.

Final thoughts on the Omega Diagnostics share price

Omega Diagnostics looks like a sound and healthy business in my eyes, but I think its share price is frankly insane. The firm only generated £9.8m of revenue in 2020. And given that it hasn’t stated the value of its new contract with the UK government, it’s tough to determine the business’s true underlying value this year.

I think the Omega Diagnostics share price is too high based on the currently available information. And so, I won’t be adding it to my portfolio today.

The post The Omega Diagnostics share price is up nearly 1,200% in a year! Should I buy now? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in Omega Diagnostics. The Motley Fool UK has no position in any of the shares mentioned. 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.

What caused the GSK share price to fall? And is this a buying opportunity for my income portfolio?

The business during the pandemic

Despite the disruptions from Covid-19, GSK has actually performed relatively well considering the operating environment.

Overall, revenue from both the pharmaceuticals and vaccines divisions were down by 3% and 2%, respectively. But newly approved products within its portfolio have seen a significant average increase in sales of around 10%. And due to rising demand for hand sanitiser, its consumer healthcare business also achieved notable 12% growth.

These are hardly groundbreaking results. But due to cost-cutting, net income for the year actually increased by 24% to £5.75bn. Consequently, dividends weren’t cut in 2020, and roughly £5bn of debt was repaid.

Needless to say, this is all quite positive. So why has the GSK share price dropped by nearly 30% since the start of last year?

Why is the GSK price falling?

In early 2020, the company announced that its consumer healthcare business will be spun off in a joint venture with Pfizer in 2022. The cost of this separation is expected to be around £2.4bn, with £1.6n being covered by disposals. Given that GSK is still a £60bn company even after the decline in share price, this doesn’t seem too expensive to me.

Once the consumer healthcare segment has been separated, GSK will become a pureplay R&D drug development company. Which, rightfully, has created concern among income investors.

Why? Because as I’ve previously discussed, drug development is a risky business. Creating new medicines is a lengthy process that typically takes up to 10 years. And even after reaching the final phase of clinical trials, there’s still a possibility that a drug won’t receive regulatory approval or become economically viable.

I believe the increased risk profile of the business has undoubtedly contributed to its share price decline. However, the primary catalyst appears to be the fact that the company is going to be much smaller after the split. The consumer healthcare division currently contributes 40% of total revenue and that will disappear after 2022.

Consequently, GSK’s famous 4% average dividend yield is expected to be cut some time in the future, making the stock look far less appealing for income investors.

Is this a buying opportunity?

But the collapse in the GSK share price looks quite attractive to me. Don’t forget that the company isn’t splitting for another year. And so, due to the falling share price, the dividend yield today is now around 6.4%, a payout that’s more than achievable in 2021. At least that’s what I think.

However, once the company has split, it will be significantly different. Developing new drugs is a difficult task, as I said. But the firm already has 20 new products expected to launch between now and 2026. What’s more, 10 of these new drugs are expected to generate over $1bn in revenue each.

To me, GSK looks like it’s transforming itself into a growth stock. And with decades of experience under its belt, this is one business I’d be keen to add to my portfolio.

The post The GSK share price is down 30% since the start of 2020. Should I buy now? appeared first on The Motley Fool UK.

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Zaven Boyrazian does not own shares in GlaxoSmithKline. The Motley Fool UK 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.

Personally, I’d much rather snap up a different lowly-valued company in London’s top tier. Before revealing its identity, however, here’s why I’m not rushing to join the queue for the battered bank.

Why I’m avoiding Lloyds shares

Perhaps the biggest reason, at least right now, is Brexit. The manner of our increasingly messy departure from the EU looks like being decided at the very last minute. Should the UK and EU fail to agree on a trade deal, I think it’s likely Lloyds will bear the brunt of the fallout. A likely reduction in economic growth could put pressure on its share price, at least until the dust settles.  

A second reason I’m avoiding Lloyds shares relates to its exposure to the housing market. Being the UK’s biggest mortgage lender might not sound like a bad thing given how hot property currently is. Even so, I suspect it might get increasingly unattractive as the full economic impact of the coronavirus is felt.

The possibility of a third lockdown in January heaps yet more pressure on businesses. The extension of the furlough scheme until the end of April may soften the blow, but unemployment rates are surely still set to rise in the near term. This will put further strain on those already struggling to make their mortgage payments. Yes, another fall in interest rates might help but that’s also bad news for margins at Lloyds. 

Third, Lloyd yields less than 1% at the moment. This is problematic for me since the sizeable pre-coronavirus dividend stream was one of the biggest attractions for holding the shares. I’m not as optimistic as others that this will be hiked significantly in FY21. 

Taking all the above into account, I think there are far better ‘cheap’ stocks on the market right now. 

Better FTSE 100 bet

One FTSE 100 stock I’d be far more interested in buying at the current time is pharmaceutical giant GlaxoSmithKline (LSE: GSK). 

Glaxo is unlikely to be impacted by any political shenanigans in the same way as Lloyds. At the end of the day, people will always require what it produces, even if year-to-year earnings aren’t totally consistent. Moreover, its truly global geographical reach means Glaxo, unlike Lloyds, will benefit from a fall in the value of sterling in the event of no deal.

Then there’s the price. At less than 12 times expected FY21 earnings, GSK’s valuation feels dirt cheap to me for a major player in a highly defensive industry.

Another reason why I’d buy Glaxo over Lloyds shares is the possibility of further consolidation in the pharma space. AstraZeneca‘s planned merger with Alexion may push other giants to come knocking on Glaxo’s door in 2021.

A final motivation is income-related. A likely 80p per share return in this financial year gives a yield of 5.9%. For comparison, the best instant access Cash ISA available returns just 0.6% a year. 

All told, Glaxo seems a far better FTSE 100 buy at the moment, I feel. Lloyds shares could still make me money over the long term, but I’m not sure my patience will stretch that far. 

The post Investors are buying Lloyds shares. I’d snap up this cheap FTSE 100 stock instead appeared first on The Motley Fool UK.

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Paul Summers owns shares in Scottish Mortgage Investment Trust. The Motley Fool UK has recommended GlaxoSmithKline, Hargreaves Lansdown, and Lloyds Banking Group. 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.

However, if you have not yet bought AstraZeneca shares, I’d look for higher returns elsewhere. Currently trading on a price-to-earnings (P/E) ratio of 97, the risk of you not making a decent return from its shares, at this price, is high.       

AstraZeneca share price performance

The AstraZeneca share price is at a historical high. Climbing steadily over the last 10 years it dropped in March in the stock market crash before exploding 53% to today’s peak price of 9,670p.

If you’d bought into AstraZeneca shares when I previously recommended them in April, you’d be sitting on a capital gain around 40%.    

However, it does raise the question, how much further can it go? Share price prediction is not a Foolish pursuit, but suffice to say that buying a firm selling at 97 times the amount the firm earns in profits, is a risky business. Especially for big pharma where drug trial failures rates can be high.

For comparison, peers GlaxoSmithKline and Unilever currently trade on P/Es of 15 and 22 respectively. Large P/Es reduce shareholder returns because there is a bigger difference between what you pay and what you get returned in dividend yields and capital gains.

Even if there is good news on the vaccine front, the relatively large number of other competitors, when combined with strong political pressure, will likely cap any profits from the venture. Lower profits mean fewer earnings.

In addition, the recent share price hikes make it likely a successful vaccine is already priced in. Ouch!

Company fundamentals

Despite my previous observations about the AstraZeneca share price, the firm has a strong balance sheet and is globally renowned for its numerous patent-protected drugs and innovative pipeline. The latter will be to its advantage if it can develop its so-far-successful COVID-19 vaccine research.

However, over the last five years, the trend in Astra’s income statement for revenues and profits is downwards. Debt, in contrast, has risen.

Some of the losses can be attributed to the failed patent drugs, Crestor and Nexium, and these are now in the past. With other promising ventures in the pipeline, the foundations are there for further company growth.         

Astra still paying dividends

Back in April, AstraZeneca shares were yielding just above 3% in dividends. Now, as the share price explodes, they are yielding only 2.4%. Admittedly, any dividend right now shouldn’t be sniffed at. However, it reinforces the point that higher share prices – and larger P/E values – lower shareholder returns.

AstraZeneca is a good company with excellent growth prospects. However, complete success for its COVID-19 vaccine is some time off, if at all. More share price growth, at this same high rate, is unlikely. If the vaccine trials aren’t successful, the market will be disappointed.

Although I think the company itself is worth an investment, it cannot be at any price. Higher prices reduce shareholder returns, increasing the risk of a purchase. Right now, AstraZeneca is too expensive for me. But, it may be worth locking in any capital gains and selling those shares if you have them.

The post Tempted by the AstraZeneca share price? Here’s what you need to know appeared first on The Motley Fool UK.

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Rachael FitzGerald-Finch has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Returning to growth

Much of this morning’s reaction is probably due to the £73bn-cap’s very strong performance in the final three months of 2018. Over this period, product sales growth of 5% (or up 8% at constant exchange rate) was recorded. With sales hitting $5.77bn while markets were tanking across the world, AstraZeneca was clearly having a very good end to the year.  

The numbers over 2018 as a whole were also pretty decent. Product sales rose 4% to a little over $21bn, supported by launches of new medicines, such as asthma treatment Fasenra where sales hit $297m in only its first full year of availablity. The popularity of cancer treatments Tagrisso and Lynparza also helped sales in AstraZeneca’s Oncology arm rise by 50%. 

Another interesting snippet was the excellent form the business had shown in emerging markets.  Sales in China, for example, jumped 28% over the year.  

Unsurprisingly, management was clearly happy with these figures. Having declared that the company had “returned to growth,” CEO Pascal Soriot went on to state that its strategy and plans “remain unchanged, with sales growth and a focus on cost management anticipated to drive growing operating profit.” This all sounds very encouraging. So, are the shares still worth buying?

Looking dear

Taking into account today’s positive reaction, AstraZeneca’s stock has now climbed 12% in value over just a couple of weeks. I think there’s certainly a chance this positive momentum will continue beyond today. 

In addition to the shares still trading below the highs reached back in November, the company’s defensive qualities arguably make it an ideal candidate for anxious investors, particularly with the US/China trade spat and Brexit still to be resolved.

Nevertheless, I’m starting to question the price being paid. Before this morning, AstraZeneca was already trading on 20 times forecast earnings for the new financial year. That feels rather dear, considering that you can buy sector peer GlaxoSmithKline for a little under 14 times earnings (even if the latter is following a very different trajectory under CEO Emma Walmsley).

But what about the company’s growth prospects? Well, a PEG ratio of below one suggests new investors in AstraZeneca would be getting plenty of potential for their cash. But this does rest on its ability to continue converting “one of the most exciting and productive pipelines in the industry” into actual medicines that sell. In a world where getting new drugs approved is a highly unpredictable, time-consuming and costly process, that’s easier said than done.

Thanks to its improving dividend cover, Glaxo also looks a better pick for income investors (something I’ve been doubtful on previously). A forecast 80p cash return this year equates to a yield of 5.1% at the current share price. AstraZeneca, in contrast, is set to yield 3.6%, with the cash payout slightly less covered by profits. 

All told, I’m not sure I’d be tempted to buy stock in AstraZeneca at the current time, particularly if I’m ‘only’ looking to pick up dividends from my investments. In my opinion (and as covered here), there are far less risky ways of generating a second income stream from the market. 

The post Here’s why the AstraZeneca share price is flying today appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. 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.

The company was hit by the devaluation of the Egyptian pound and an increasingly tough environment in the US where “competition is increasing and pricing pressure is intensifying,” according to CEO Said Darwazah.

First-half revenue rose 1%, while operating profit fell 7% after a strong performance in Generics was offset by a weaker showing from Branded Generics. Strong operating cash flow helped the company reduce net debt from $697m to $633m, a perfectly healthy level considering the defensive nature of pharma companies.

Investors will surely be disappointed, but some cautiously optimistic comments regarding Hikma’s Advair generic will go some way to soothing long-term fears. Sales of Advair, GlaxoSmithKline’s (LSE: GSK) premier blockbuster drug, have held up better than expected since its patent expired back in 2016, because the Diskus delivery system it employs has been a tough one to crack for both Hikma and rivals Mylan and Novartis alike.

Hikma said it has managed to “clarify and resolve” a number of the FDA’s questions regarding the key drug and reiterated there were “no material issues” concerning eventual approval. A more detailed update has been promised, but given the deterioration in the company’s outlook, investors might not relax until more context has been given.

These delays are certainly to the benefit of Glaxo. Its massive 5.3% yield is barely covered by cash-flow and the extended no-competition period for Advair grants some much-needed breathing space so it can squeeze more out of its other businesses.

Right direction

I firmly believe that GSK is moving in the right direction and that a combination of margin expansion and slow-but-steady sales growth will eventually better cover the dividend. If this happens, it would not be surprising to see the shares re-rate to a more normal yield of around 4.5%, indicating a near 20% upside if the market gets comfortable with the payout.

The company’s free cash flow jumped from £0.1bn in the first half of this year to £0.4bn, but if it is to achieve its target “to build free cash flow cover of the annual dividend to a target range of 1.25-1.50x,” it must continue its run of form.

The rate of inevitable decline in Advair sales will be key for GSK over the next few years, as will performance in its HIV division which has really picked up the slack for the company of late. The firm did warn of “the impact of generic competition to Epzicom/Kivexa,” so investors would do well to keep a close eye of the performance from the HIV treatments in future updates.

I find both companies attractive propositions at current prices. Hikma has had a terrible year, but its strong presence in North Africa and the Middle East should continue to drive growth as healthcare spend increases. Similarly, Glaxo might run into some short-term issues covering the dividend, but its pipeline looks bright and I’m cheered by new CEO Emma Wamlsley’s strategic plan, specifically regarding a refocusing of capital allocation in the pharma business.

The post Hikma Pharmaceuticals plc’s pain could be GlaxoSmithKline plc’s gain appeared first on The Motley Fool UK.

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Zach Coffell owns shares in GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended Hikma Pharmaceuticals. 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.

It’s thought that sales of the potential new treatment could be as much as $1bn a year, making it one of the firm’s new-generation blockbusters. If Shingrix takes off it will send a clear signal that GlaxoSmithKline is emerging from its patent-cliff induced torpor of recent years to fly on the uplift of its maturing drug development pipeline. 

Emerging assets

Although Shingrix is not currently approved for use anywhere in the world, the company says that in addition to the US, regulatory submissions in the European Union and Canada are on track for 2016 and planned for Japan in 2017. 

The new vaccine is one of more than 40 assets the firm revealed to investors at a research and development event in November 2015. The potential shingles treatment is part of the company’s vaccines portfolio, which consists of six core areas of scientific research and development that the firm is working on, any one of which is capable of producing multiple future big-selling products capable of re-energising the firm’s growth prospects. 

GlaxoSmithKline is well-known for its consistent cash-generating qualities. The firm has much in common with other consumer goods firms, such as detergent and food manufacturers, tobacco suppliers and alcoholic drinks producers. Customers tend to repeat-purchase such firms’ products on a regular basis and that tends to make cash flows into their businesses steady and predictable. 

Returning to growth?

Steady cash flow enables reliable dividends, and in the dark days of GlaxoSmithKline’s period of falling earnings during recent years astute investors such as Neil Woodford kept faith with the firm’s shares. A rise in the share price from around 1,000p during 2009 to 1,650p today vindicates those investors who did decide to hold through the company’s troubles. 

Instead of falling earnings-per-share figures, City analysts following the firm now predict rising earnings, with an uplift of 29% this year and 8% during 2017. I reckon we could see further growth in earnings in the years to follow as GlaxoSmithKline delivers more from its drug development pipeline. I know that Neil Woodford looks for a steady dividend that is capable of growing, but I think there is evidence that GlaxoSmithKline’s growth prospects are coming back to life, which introduces the tantalising prospect of further capital growth for investors too.

GlaxoSmithKline’s shares change hands on a forward price-to-earnings ratio of just over 15.5 for 2017. While waiting for growth to lift the shares, investors will collect a dividend payout yielding a forward 4.8%, covered 1.3 times by anticipated earnings. The valuation seems undemanding if the firm is set to return to consistent growth, but even if growth proves elusive, I reckon the defensive nature of the firm’s business is likely to keep the shares solid in the years ahead.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

The truth of that statement is plain to see — revenue and earnings fell just about every year since 2012 and look set to continue falling during 2016 and 2017. Between 2011 and 2017, City analysts expect around $17bn to have been lost from annual sales.

Ambitious turnaround plan

However, Mr Soriot is cutting deep into AstraZeneca’s culture, its bloated workforce, and the firm’s economics in the belief that such radical surgery will transform the company into a speciality drugs supplier focused on treatments for cancer, respiratory and cardiovascular diseases, and similar areas that have potential to drive future sales. That’s in contrast to the mass-market approach that fuelled AstraZeneca’s previous ascendancy, but which is now losing its wheels.

Thousands of redundancies over the last three years precede more to come — painful but necessary, and an indication of how the firm is bearing down on selling, general and administrative costs. Meanwhile, research and development (R&D) spend runs at around 24% of sales, which is a figure that exceeds the industry average. Spending on R&D can be a good forward indicator for investors. A sustained programme of R&D investment often creates real value that could pay dividends down the line.

Targeting talent

The bold centrepiece of Mr Pascal’s master plan for AstraZeneca is the new $500m corporate headquarters and research hub the firm is building near Cambridge. It aims to attract top brains from Britain’s best university labs to enable ground-up research to drive AstraZeneca’s forward growth. That kind of initiative seems to be what many have been crying out for — it’s just what Britain and AstraZeneca need to help commercialise the country’s raw talent. This move could prove to be a masterstroke that powers the company’s comeback.

The firm has already shifted around a quarter of its UK workforce into rented accommodation around Cambridge to work closely with academic researchers. Mr Soriot thinks his game plan has great potential and said two years ago that he expected sales to rise to $45bn by 2023. That would be a more-than-90% increase over the $23.6bn the firm achieved during 2015 and would work wonders for the company’s share price.

AstraZeneca has gone ‘nuclear’ on R&D which, along with a lively bolt-on acquisition programme, seems set to rejuvenate the firm’s product pipeline. AstraZeneca oozes potential right now, and investors can hop aboard for a forward price-to-earnings rating of just over 14 at today’s 3,876p share price. That strikes me as a reasonable price, and there’s a 5% forward dividend yield to keep us warm while we wait.                                                               

The post AstraZeneca plc goes ‘nuclear’ on R&D spend to double sales appeared first on The Motley Fool UK.

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Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has recommended AstraZeneca. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.