Today’s second-quarter and half-year results from pharmaceutical giant GlaxoSmithKline (LSE: GSK) reveal to us a mixed bag of numbers. Revenue in the first six months of the year rose 5% at constant exchange rates compared to the equivalent period last year and adjusted earnings per share moved 11% higher.
A battle to rebuild revenues and profits
The news isn’t so good on cash flow, though. Net cash from operations declined 8% and free cash flow declined by 35%. Given that companies generally use their free cash flow to pay shareholder dividends, it’s no surprise that the dividend will be 19p, leading to an anticipated 80p total dividend for the year. The dividend has been frozen yet again, which is a situation that extends back around five years.
In common with other large, established pharmaceutical outfits, the story of GlaxoSmithKline is one of a battle to rebuild revenues and profits. Shrinking income from one-time best-sellers has been dragging on the financial results for years now because of the loss of patent protection on older products. Meanwhile, the company is fighting to replace lost turnover by developing and bringing new drugs to market.
Chief executive Emma Walmsley said in the report that the firm saw “good” operating performance in the second quarter “despite the loss of exclusivity of Advair.” The outcome has encouraged the directors to increase their expectations for the year. But even now, it’s nothing to get excited about. Adjusted earnings per share will likely decline between 3% and 5% at constant exchange rates, but that’s better than the 5% to 9% decline previously expected.
Slow recovery
As for a long time, shares in GlaxoSmithKline will not keep you awake and buzzing at night as you watch them shoot for the sky. But you probably won’t spend too many sleepless nights worrying about them either. I think that’s a good reason to hold them, for me. The dividend is chunky and keeps on coming. Although it hasn’t grown for a while, the payment hasn’t been cut either. Meanwhile, the share price has been creeping up. If you’d held for the past 10 years, you’d be up nearly 60% on the share price, which would have combined nicely with your dividend income gains.
I believe the firm is moving to a better place operationally even though the pace seems slow. Walmsley assured us in the report that GlaxoSmithKline is focused on strengthening its R&D pipeline alongside the execution of new product launches. She said that positive clinical data this year offers “significant new opportunities for products in Oncology, HIV and Respiratory.” On top of that, more readouts should come through in the second half of the year.
As well as the R&D pipeline, shareholders could see value created by the upcoming completion of the firm’s joint venture with Pfizer “laying the foundation for the creation of two great companies: one in Pharmaceuticals/Vaccines; one in Consumer Healthcare.”
At today’s share price close to 1,658p, the forward-looking earnings multiple for 2020 is just over 14 and the anticipated dividend yield is around 4.8%. I think that valuation looks undemanding and I’d still buy shares in GlaxoSmithKline.