What You Were Selling 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 selling recently might well provide us with some ideas for investments that may be past their prime

So, in this series of articles, we’re going to look at what customers of The Motley Fool ShareDealing Service have been selling in the past week or so, and what might have made them decide to do so.

Bribery and fraud

GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) really hasn’t had a good time on the public relations front over the past year.  At the end of June 2013, Chinese police announced that they had arrested some GSK officials for “economic crimes”. This was followed by a statement by China’s Public Security Ministry, which accused GSK of bribing doctors to prescribe their drugs.

Since then the allegations have continued, both in China and elsewhere, with GSK revealing in April that it was investigating allegations of bribery in Jordan, Lebanon and Iraq, and claims by a Panorama investigation that a Glaxo regional manager in Poland had been charged with corruption, together wth 11 local doctors.

Events in China came to something of a head last month, with the release of the Chinese police’s findings that GSK, both as a company and through the actions of individuals, engaged in bribery on a “massive scale”, and the charging of Mark Reilly, the British former head of GSK in China, with bribery and fraud. And GSK’s PR nightmare has continued, with revelations that despite Chinese employees having been instructed to pay bribes out of their  pocket, the company is now refusing to reimburse them.

Fear of the worst

GSK’s sales in China have, perhaps predictably, plummeted, and probably won’t recover for many years. That’s bad, of course, but China is still a small market for GSK, amounting to only around 5% of its global revenue. So even if its Chinese sales were wiped out entirely, the effect on GSK’s financial performance would be relatively limited — although any plans the company might have had for growth in what is, after all, a colossal emerging market, now lie in tatters.

What’s far worse, however, is the potential outcome of the criminal investigation launched by the UK’s Serious Fraud Office (SFO) last week, looking into whether the company breached the UK Bribery Act, and the possibility that GSK could also be found liable under the US  Foreign Corrupt Practices Act. If found guilty under either law, the fines could be enormous, and the damage to GSK’s global reputation would be equally large.

Despite Buffett’s famous maxim, sometimes fear is justifiable. So perhaps it’s fear of the worst that persuaded some shareholders to sell, putting GlaxoSmithKline in the number 4 spot in our latest “Top 10 Sells” list*. 

Not guilty yet

Of course, GSK hasn’t been found guilty yet, and may not be. And even if it is, any fines or reputational damage may be significantly mitigated by its cooperation.  As a potential long-term investment it has a lot of things in its favour. It’s a global giant in its field, with a terrific pipeline of potential treatments, and the recent asset-swap with Novartis will allow it to build on its strengths without being distracted by under-performing business.

It also pays a hefty dividend — currently around 5%, and expected to rise to 5.2%in 2015, thrashing the FTSE 100 average yield of around 3%. So, GSK’s current troubles could be presenting an opportunity to buy into a top-quality company at a reduced price (it’s currently down 7% on this time last year).  But only you can make that decision.