2015 is shaping up to be a pretty terrible year for GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US). Year to date, the company’s shares have hardly budged while the rest of the FTSE All World Pharma & Biotech sector has risen by 10%.
And now Glaxo’s shares are closing in on their 52-week low of 1,296p, after falling by 14% during the past 12 months.
But should investors look to buy on this weakness or could Glaxo’s shares fall further?
Investor concern
Investors have turned their back on Glaxo during the past 12 months for several reasons.
Firstly, there’s been plenty of speculation that the company is contemplating a dividend cut. As a result, investors have been selling up and searching for a safer yield elsewhere.
Secondly, there’s been some concern about Glaxo’s new business strategy. In particular, the group has recently reduced its dependence on the lucrative pharmaceutical market by increasing investment in the slow-and-steady vaccines and consumer healthcare market.
For example, a $20bn asset swap with Novartis last year saw Glaxo trade its lucrative cancer drug portfolio for vaccines and consumer healthcare assets.
Management targets
Investors’ concerns regarding Glaxo’s change of strategy and dividend sustainability are well founded.
However, the company’s management has recently come out to dispel these worries.
It’s expected that Glaxo’s core earnings per share will decline by 15% this year. But from 2016 to 2020, group revenue is expected to grow at a compound annual growth rate of “low-to-mid single digits”. What’s more, over the same period, core earnings per share are expected to expand at a rate in the “mid-to-high single digits”.
Cost savings will help the group maintain its dividend payout. Glaxo’s management has stated that a per-share payout of at least 80p is guaranteed for the next three years.
At present levels, a payout of 80p per share translates into a dividend yield of 5.9%.
Impressive pipeline
Concerns over Glaxo’s business strategy also seem to be overdone. Glaxo has had more drugs approved by regulators than any other pharmaceutical company over the last five years. And this trend is set to continue.
City analysts who specialise in the pharmaceutical sector have commended Glaxo’s treatment pipeline, rating it as one of the best in the business. Glaxo’s R&D spending currently amounts to £3.5bn per annum.
Also, Glaxo is hunting out the best joint-venture opportunities in the market.
This week the company announced the launch of three early-stage biotech companies jointly funded with Avalon Ventures, a US investment firm.
The bottom line
Overall, Glaxo looks to be a classic contrarian buy after recent declines.
The company’s dividend appears to be safe for the next three years, and while earnings are set to contract this year, steady growth is predicted through to the end of the decade.
For long-term investors who are prepared to wait, and take home an attractive 5.9% dividend yield, Glaxo could be a great buy.
