Shares in GlaxoSmithKline (LSE: GSK) have risen modestly so far this afternoon, despite the company reporting a 21% fall in core earnings for 2015.
City investors were pleased because Glaxo’s full-year results, which were published at noon on Wednesday, were exactly in line with forecasts. Revenue of £23.9bn was up 4% on the year, while earnings per share of 75.7p matched up with forecasts for earnings of 75.9p per share.
Although there were declines in various areas, these appear to be stabilising and were as expected. The whole picture is one of a company that should be able to fulfil its promise of returning to growth in 2016.
Shares in Glaxo have trended lower since mid-2013. The firm has had to cope with a sharp decline in sales of key respiratory products and a major restructuring. Glaxo stock is worth around 15% less than when it peaked in May 2013, but the firm has been able to protect its dividend.
Dividend strength?
Today, Glaxo confirmed an ordinary dividend of 80p for 2015, plus a special dividend of 20p. This will be paid alongside the final dividend in April and will mean that shareholders have received a trailing yield of 6.9% this year. That’s a decent compensation for the firm’s lacklustre share price performance, in my view.
Glaxo confirmed today that it expects to pay a dividend of 80p in both 2016 and 2017. While growth isn’t on the cards, I can live with a flat payout for a couple of years if the firm’s turnaround continues to plan.
Today’s figures suggest that the underlying performance of the business remains strong. Glaxo’s core operating profit margin was 23.9%. The profits from the sale of the Oncology business were used to reduce net debt from £14.4bn to £10.7bn. This should cut finance costs going forward and strengthens the firm’s balance sheet.
New products = new sales
Although Glaxo has suffered from falling sales of its ex-patent product Advair, the group does have a pipeline of new products which are now starting to feed through to sales.
£2bn of new product sales were reported for last year, driven mainly by Glaxo’s HIV business and its respiratory division. New product sales are now expected to hit the group’s target level of £6bn in 2018, two years ahead of the original 2020 target date.
Outlook improving
In May 2015, Glaxo told investors that it hopes to achieve mid-to-high single digit annual growth in core earnings per share between 2016 and 2020, excluding exchange rate movements.
Today’s results give me confidence that this target is reasonable. Indeed, the firm may manage to beat its own targets. In its guidance for 2016, Glaxo said that it hopes to achieve double-digit earnings per share growth, on a constant exchange rate basis.
This ties in with the latest analysts’ forecasts, which suggest that Glaxo’s core earnings per share could rise by 11% to 84.4p in 2016. This puts the firm’s stock on a forecast P/E of 16.9 with a prospective yield of 5.5%.
This looks attractive to me, and I recently added more Glaxo shares to my portfolio. I rate the stock as a strong long-term income buy.