A few years ago GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) was looking stronger than rival AstraZeneca, with its more promising pipeline and better acquisition strategy offering better protection from the loss of patent protection on key drugs.
But that’s been turned on its head since Pascal Soriot joined and revamped AstraZeneca, so what are the prospects like now for future growth at Glaxo?
After a couple of years of pretty much no change in earnings per share (EPS) from GlaxoSmithKline, there’s a hefty drop of 17% forecast for the year ending December 2014, and this close to year-end it’s unlikely to be far out.
Strong pound
At third-quarter time, core earnings per share came in 14% down at actual exchange rates, but at constant exchange rates the figure was only minus 2%. Like many multinationals reporting in Sterling, GlaxoSmithKline is suffering from the effects of a strong pound. But the firm expects “full year 2014 core EPS to be broadly similar to 2013” at constant exchange, suggesting that the business itself is really not that far off growth.
The Q3 dividend was held steady at 19p per share, but Glaxo expected to lift its full-year dividend as it has been doing year-on-year, and that lends more strength to its confidence in its longer-term growth potential.
Dividend forecasts suggest a yield of a very healthy 5.5% this year at today’s price levels of around 1,475p, and something very similar in 2015. But before we get too excited at that, it would be covered less than 1.2 times by forecast earnings for each of the two years.
Glaxo is clearly gearing its dividends to its expected future earnings growth, and there are strong signs we could be seeing that recovery coming very quickly, as the firm is in a period of intense restructuring that is expected to reduce costs by £1bn over three years — with half expecting to be realised by 2016.
The disposal of some non-core businesses looks set to continue too, which in the short term should raise some cash and in the longer term will hopefully beef up the company’s margins.
Growth worth buying?
What’s the price of that potential return to growth?
Well, Glaxo shares are on a year-end P/E of 16 dropping to 15.6 based on 2015 forecasts, and that’s only a little above the market average. On dividends alone that looks to be justified, but today’s yields won’t be sustainable unless that earnings growth really does get back on track.