Dear Mr. Berko: My broker has recommended that I invest $20,000 and buy 500 shares of GlaxoSmithKline, a world-class drug company. The dividend is $2.48 and that yields a very attractive 5.9 percent He thinks Glaxo’s problems are over and that the stock can double in price to $80 in the coming three to five years. Please give me your thoughts on this stock. I’ve been reading your column for over 30 years. You are one of the few people I trust to give me a straight answer because you don’t have a horse in this race. — KS: Oklahoma City, OK
Dear KS: GlaxoSmithKline (GSK-$42) has fallen from investor’s radar screens during the last few years — a consequence of several high-profile clinical failures that nearly destroyed its oncology pipeline. Its flagship asthma medication, Advair, has lost significant market share and its newer respiratory medications, like highly touted Breo Ellipta, have been painfully slow to launch.
And GSK got caught in a 2014 bribery scandal in which a subsidiary in China was found guilty of persuading hospitals and doctors to prescribe and administer the company’s pharmaceuticals over those of its competitors. That scandal cost Glaxo nearly $500 million. Management is still bowing and scraping to improve its image and is still dealing with the aftermath that also includes bribery and improper payments in Poland, Lebanon, Romania and Jordan. Bribery is fine and acceptable in those countries (in the U.S., too) as long as one doesn’t get caught.
Even with all that kerfuffle and brouhaha, I’d be a GSK buyer to earn a handsome 6.2 percent dividend while waiting three to five years for the shares to double in price. Apparently, management believes its problems are over and many on the street believe management will increase the dividend this year.
In 2013, Glaxo had revenues of $42 billion, earned $3.52 a share and paid a $2.37 dividend. GSK has been bloodied by increased generic competition on some its blockbuster medications and further hammered by cheaper generics flooding the U.S. and European markets. As a result, 2014 revenues declined to $38 billion and earnings fell to $1.88 a share, but Glaxo paid a $2.66 dividend. In 2015, revenues declined again to $36 billion, earnings fell to $1.50 a share, and the dividend was reduced to $2.48.
It’s been a tough two years for GSK as the shares foundered from $54 in 2013 to $38 last October. However, management recently bought Bristol-Myers pipeline of HIV drugs that includes some very promising late stage and early stage assets. This acquisition of promising HIV meds will strengthen one of GSK’s strongest growth platforms. GSK is already the majority owner of ViiV Healthcare, which manages the second-largest HIV business in the world. The HIV business is expected to contribute significantly to GSK’s top line comparisons. GSK also traded its oncology assets for Novartis’ vaccine business last year. This asset swap gives GSK a broad lineup of vaccine standouts that include Bexsero (immunization against invasive meningococcal meningitis) and Menveo that’s used to prevent infections caused by meningococcal bacteria. Vaccines are about 20 percent of revenues and growing. GSK’s recent launch of its high margin HIV drugs are quickly gaining market share and should add nicely to earnings in the coming years. GSK’s respiratory business is on the rebound and the company’s launch of next-generation respiratory drugs should mitigate the competition from generics. The attractive 5.9 dividend is an impressive yield especially from a quality, pale blue chip pharmaceutical company with an impressive research department and an impressive stable of effective drugs and an impressive worldwide reputation.
T. Rowe Price, Vanguard and Fidelity combined own over 25 million shares while Institutions like Bank of New York, Royal Bank of Canada, JP Morgan, Wells Fargo, etc., own over 100 million shares. Meanwhile, Argus has a buy recommendation on the stock and so does Reuters and Bank of America. You have a wise broker and I trust his recommendation.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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