GlaxoSmithKline’s (LSE: GSK) shares are a tremendous opportunity for income investors, according to Adrian Frost, manager of the £7.3 billion Artemis Income fund.
Glaxo has been an income investors’ favourite for some time, but Frost believes that now is the time to buy, ahead of a company-wide restructuring.
Indeed, pricing pressures around the world, coupled with patent expirations have taken their toll on Glaxo’s sales. And after years of sluggish growth, there is a growing clamour for Glaxo to restructure its operations.
Adrian Frost believes that now Glaxo’s asset-swap deal with Novartis has taken place, the company will undertake an aggressive restructuring plan. The goal of the restructuring will be to unlock value from Glaxo’s individual business units — such as vaccines and consumer health.
Restructuring ahead
Glaxo’s management has already kicked off a company-wide restructuring after reporting a terrible set of 2014 results. Specifically, Glaxo’s revenues fell 10% to £6.2bn during the fourth quarter of last year while operating profit plunged 72% to £691m.
And alongside these results, Glaxo’s chief executive Sir Andrew Witty announced that the company was considering spinning off its HIV joint venture, ViiV Healthcare.
Sir Witty also mentioned that Glaxo was open to other deals that might help streamline the group. The ViiV Healthcare spin-off could raise up to £17bn, which is likely to be returned to investors.
Unlocking value
Broadly speaking, Glaxo’s restructuring will work in favour of income investors. You see, there are a number of businesses under the Glaxo umbrella, and some these businesses are performing better than others.
For example, Glaxo’s consumer health division is one of the world’s largest consumer health product suppliers, producing a range of over-the-counter medicines and skin treatments. Income from this division is relatively stable and predictable. The same can be said for Glaxo’s vaccines unit.
However, Glaxo’s respiratory business is more unpredictable. Many of Glaxo’s troubles over the past few years can be traced to the group’s respiratory business.
With this being the case, if Glaxo restructures its business to focus on its key vaccines and consumer health divisions, the company’s income stream and sales growth will become more predictable.
A stable, predictable and recurring income stream is perfect for income investors. Still, Glaxo is hardly unattractive as an income play at present. The company’s shares currently support a dividend yield of 5.1%, and Glaxo is planning to issue a £4bn special dividend to investors later this year.