The latest big news for GlaxoSmithKline (LSE: GSK) (NYSE: GSK) is its new deal with Novartis — some assets will be transferred in one direction, others in the opposite direction, and there will be a new joint venture to deal with a lot of the two companies’ consumer products.
It seems like a good idea for each company to focus on what it does best, though it will take some time for that to feed through to the bottom line.
Strong outlook
But for GlaxoSmithKline at least, any benefits will add to what is already looking like a decent outlook for the company over the next couple of years.
Through its vast product diversification and a big financial commitment to its drugs-development pipeline, Glaxo has been coping with the effects of the patent cliff pretty well — some blockbusters have lost patent protection and there is increasing competition from generic alternatives.
And while some may have expected a few years of falling earnings, as currently experienced by rival AstraZeneca, Glaxo has managed to keep its earnings stable — analysts are expecting just a 2% fall in earnings per share (EPS) for the year to December 2014. And while the AstraZenenca dividend was frozen, Glaxo’s has kept on growing.
Return to growth
For 2015, there’s a return to growth with a 9% EPS rise on the cards — and that all-important dividend is set to rise again, from an expected yield of 5.2% this year to 5.4% on today’s 1,650p price level.
The trend in the analysts’ consensus, however, has been downwards — as it has been with a lot of the FTSE’s top shares over the past 12 months. A year ago, we were looking at a consensus for 2014 earnings of 125p per share, though that has steadily falling and the City boys are now expecting 110p. It’s a disappointing drop, but it does still leave the shares on a forward P/E of 15, and that’s lower than the current average.
Forecasts for 2015 have fallen in line, with a mooted EPS figure of 131p three months ago being downgraded to 119p today — but that drops the P/E to 14, which is attractive.
The trend in dividend forecasts has been more encouraging, with the 2014 forecast having been dropped by only a penny from the 81.8p the analysts were predicting a year ago to 80.8p today. It won’t be very well covered by earnings, but it should be safe enough.
Cautious for now
With such a cautious trend, it’s perhaps not surprising to see the bulk of around 30 analysts sticking to a Hold recommendation at the moment — but that could change when they’ve had time to scratch their heads over the Novartis tie-up.
The next few months should be interesting for Glaxo watchers.