FTSE 100 giant GlaxoSmithKline (LSE: GSK) reported full-year results for FY2017 yesterday. Let’s take a closer look at the results and examine the investment case for the healthcare giant. Are the shares a bargain at current levels?
FY2017 results
GSK’s revenue for the period increased 8% (3% at constant currency) to £30.2bn. This was slightly ahead of analysts’ estimates. Sales grew across all three divisions, with the Vaccines division putting in the strongest performance with growth of 12% (6% constant currency).
Adjusted earnings per share came in at 111.8p, growth of 11% (4% constant currency) and the full-year dividend was maintained at 80p per share. CEO Emma Walmsley described the results as “encouraging.”
Investment case
I can see both a bull case and a bear case for buying Glaxo shares right now.
On the bull side, the shares look cheap, and the dividend yield is high. GSK has slumped from above 1,700p in June last year to 1,320p today. That leaves the stock trading on a trailing P/E ratio of just 11.8. Furthermore, the dividend yield looks compelling, at 6.1%. When you consider that it’s hard to get more than 1% per year from a savings account, a yield of over 6% is tempting.
Also, there’s the world’s ageing population to keep in mind. It’s something I wrote about here recently. The global population is getting older. As a result, demand for healthcare products should remain buoyant over the long term. Glaxo is looking to improve its pharmaceuticals business and strengthen its pipeline, and in the long run, should be able to capitalise on this theme.
On the bear side, there are several issues that investors need to be aware of.
In the near term, there are concerns over profitability. Much of this is based around the timing and impact of possible generic competition to GSK’s asthma drug Advair.
Glaxo yesterday advised that in the event of no competition in the US this year, adjusted earnings should be between 4% to 7% higher at constant currency. However, in the event that a generic competitor to Advair is introduced mid-year, adjusted earnings could fall 3% at constant currency. Both scenarios reflect the benefit of the recent US tax reform.
Dividend prospects
Many investors are also concerned about the dividend. Yesterday, the company advised that shareholders should continue to expect a payout of 80p for 2018. It also said that it recognises the importance of dividends to shareholders.
However, the healthcare giant advised that the dividend will not be increased until free cash flow cover reaches 1.25-1.50 times. Given that free cash flow for 2017 was £3.4bn and the dividend cost the company £3.9bn (a ratio of 0.87), dividend growth looks some way off. Furthermore, a potential consumer health acquisition, such as that of Pfizer, could put a strain on Glaxo’s ability to pay its dividend going forward.
Weighing up both sides, it’s hard to call the investment case for Glaxo right now. From a pure income-investing perspective, there are better dividend stocks out there, in my view. However, from a long-term, tuck-away-for-the-future angle, GSK could have potential.
