Wednesday’s first-quarter results from pharma giant GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) contained the usual fluctuations seen in short-term financial results, but didn’t highlight any major problems.
Indeed, my overall impression was that Glaxo is making good progress in a challenging market.
In this article, I’m going to take a closer look at three key numbers from this week’s results, and explain why I still rate this this global business as a buy, despite its full price and alleged corruption issues.
1. 27%
Glaxo reported an operating margin of 27% for the first quarter, highlighting the fat profits available from its portfolio of patented and branded medicines, many of which don’t have direct competitors.
This isn’t a fluke, either — the firm’s average operating margin over the last six years is 26%.
Glaxo’s high margins and controlled capital expenditure mean that this business generates a lot of free cash flow (surplus cash after tax, interest and capital expenditure) which can be used to pay dividends.
Over the last twelve months, Glaxo has generated free cash flow of £5.6bn, covering its £3.9bn dividend bill 1.4 times, making it a pretty safe payout.
2. 6%
Glaxo’s increased its first-quarter dividend by 6%, compared to the same period of last year, highlighting its inflation-beating income credentials.
The firm’s payout has risen by an average of 6.5% per year since 2008 and its shares currently offer a yield of around 4.8%, providing long-term investors with a generous income that’s stayed ahead of inflation.
Shareholders should also get a bonus payout early in 2015, as Glaxo has said it will return £4bn to shareholders — equivalent to 82p per share — following the sale of its Oncology division to Swiss firm Novartis.
3. 185%
Unfortunately, Glaxo’s third key number is one I would be happy to do without. Glaxo has a something of a borrowing habit, which I believe the firm should make more effort to bring under control.
The pharma firm’s net gearing is currently 185%, thanks to net debt of £13.7bn. This equates to around £2.82 of debt for every share, which gives Glaxo a debt-adjusted P/E ratio of 17.7 — not especially cheap.
I’m still a buyer
Despite this, Glaxo’s size, high margins and high yield mean that I remain a buyer of the shares, which form a substantial slice of my retirement portfolio.