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GSK - Gone nowhere for 10 years but......

Medical related share discussion
FredBloggs
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GSK - Gone nowhere for 10 years but......

#94874

Postby FredBloggs » November 11th, 2017, 10:32 am

As an "opportunistic total return investor" my tentacles have been twitching today over GSK. Not the kind of thing I'd normally buy, but the opportunist in me is intrigued by a dividend that is now north of 6% (according to HL, link and image below) and a share price that is the same as it was ten years ago. Not normally an income investor, as such but I have added a couple of cash cow stocks to my ISA/SIPP and I'm tempted to think GSK could be another one to add. Pays a nice generous divi, surely GSK has to "do something" about it's share price or it could succumb to a break up or even a lock stock and barrel bid by one of the Pfizers of this world. I am aware that there is concern that GSK is eating itself by paying and retaining this level of dividend, a cut is a concern. But how much of a concern, I don't know. If GSK were to be a cutter it could go well south from here in value. On the other hand, I have worked at a couple of GSK's manufacturing sites in the UK as a contract engineer and from the inside the business looks solid. Well qualified PhD chemists start off on making tea duties, almost. The business is full of this calibre of people. What do the Fools think of my objective of being paid handsomely while waiting for the share price to pick up some lost ground?

Image

http://www.hl.co.uk/shares/shares-search-results/g/glaxosmithkline-plc-ordinary-25p

jackdaww
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Re: GSK - Gone nowhere for 10 years but......

#94893

Postby jackdaww » November 11th, 2017, 11:54 am

have held these for over 15 years , average buying price 1150 , so getting 7% on purchase cost.

not a bad share !

buffett and woodford have sold out though , i am reducing a bit .

:)

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Re: GSK - Gone nowhere for 10 years but......

#94895

Postby Snorvey » November 11th, 2017, 12:00 pm

I've done quite well out of GSK over the years through a combination of top slicing gains and, of course, taking that quarterly dividend and I'm quite happy to continue my easing in / easing out approach at time goes on.

Other shares like this would be the likes of the big oilies, BAE, Vodafone, Aviva and so on.

It's tinkering Jim, but not as we know it. Just tinkering around the edges.

FredBloggs
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Re: GSK - Gone nowhere for 10 years but......

#94908

Postby FredBloggs » November 11th, 2017, 12:27 pm

Thanks all. I bought in after the Glaxo/Welcome merger. For some stupid reason the shares went "on sale" at around 500 to 550p if I recall correctly. It's a hazy memory now but I "think" I eventually got out at a price not too dissimilar to what we are seeing at GSK today. So, I haven't held them for ages now. GSK is one of the very few remaining world class British companies, (count them on one hand). I know there is negative sentiment, Woody, Buffet etc.... I haven't completely lost my marbles yet, I see value here? Anyone else too?

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Re: GSK - Gone nowhere for 10 years but......

#94928

Postby CommissarJones » November 11th, 2017, 1:22 pm

FredBloggs wrote:What do the Fools think of my objective of being paid handsomely while waiting for the share price to pick up some lost ground?


Enjoy it while you can, because IMV the dividend is clearly at risk. The new CEO has been both consistent and very explicit in saying that going forward, the divi will be priority #2 for the use of capital after the financing needs of the business. So my perception is that the groundwork has been put in place to provide justification for a cut; now GSK's executives can say, "We're just adhering to previously declared priorities for using capital."

The current state of play is that the divi is on hold through 2018, but I would not be surprised at all to see it cut at some point after the release of the fourth-quarter and annual figures for 2018, which will take place in January or early February of 2019. I sold my GSK stock in September, after holding for almost a decade, and have not regretted that decision for a second. Granted, I was holding GSK in my HYP, so that was strictly an income proposition rather than being evaluated on total return and our motivations are not exactly the same. Best of luck.

FredBloggs
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Re: GSK - Gone nowhere for 10 years but......

#95054

Postby FredBloggs » November 11th, 2017, 11:40 pm

@CommissarJones Thank you. Indeed, that's the risk. With my opportunistic head on, it looks very attractive in the same way that I get free leccy and gas from my NG divi. My concern is the potential value trap. Yesterday I was 75/25 on buying. Today, I'm more 60/40 tending towards 50/50.

ADrunkenMarcus
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Re: GSK - Gone nowhere for 10 years but......

#95580

Postby ADrunkenMarcus » November 14th, 2017, 12:34 pm

Ironically, from a total return perspective I think GSK could do better if the dividend is reduced (provided they wisely reinvest the cash into the business and generate a good return on capital). Short term, I suspect the dividend is helping keep the stock price up.

Held from 1998 to 2010. Bought 2015, will likely sell down early in 2018.

Best wishes


Mark.

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Re: GSK - Gone nowhere for 10 years but......

#106928

Postby jwillis3 » December 31st, 2017, 10:07 am

Just watched a fascinating TED talk yesterday on the use of short wave UV light to kill antibiotic resistant bacteria - a cheap and widely applicable solution to a dangerous problem. Its been extensively researched and awaiting FDA approval. This is not good news for pharmaceuticals but good for the planet.

I sold my pharma shares a while back ( I had considered them buy and hold forever shares) after watching a Horizon programme on future developments, one of which included gene therapy for terminal cancer which was curative. Its early days, but the unlocking of the human genome has huge implications for the way we look at curing disease. Big pharma has millions (billions?) collectively invested in drug development programmes that may have no future. I think they have a tough time ahead.

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Re: GSK - Gone nowhere for 10 years but......

#106946

Postby scrumpyjack » December 31st, 2017, 11:15 am

I don't think the dividend at GSK is particularly safe. The current CEO has indicated it will be maintained for another year or two, I recall.

Over the last 5 years shareholders equity has collapsed from 5,800m to 1,124m. Looking at their record it looks like the dividend has not been supported by earnings for years.

Unless they can come up with something fairly dramatic things don't look good. Having 1st class Phds making the tea is unlikely to be a recipe for success! Yes it's good to have talented people but those talents need to be deployed effectively. I'm not surprised Buffet and Woodford have got out.

I know Woodford got fed up because he thought the co should be split up (Pharma and Consumer), but the new CEO won't do that. Lets hope she quickly proves her strategy or someone else breaks it up.

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Re: GSK - Gone nowhere for 10 years but......

#107046

Postby PrincessB » December 31st, 2017, 5:10 pm

Hello jwillis3,

I sold my pharma shares a while back ( I had considered them buy and hold forever shares) after watching a Horizon programme on future developments, one of which included gene therapy for terminal cancer which was curative. Its early days, but the unlocking of the human genome has huge implications for the way we look at curing disease. Big pharma has millions (billions?) collectively invested in drug development programmes that may have no future. I think they have a tough time ahead.


I'm less pessimistic. I agree with your point wholeheartedly but I feel that the headline making medical breakthrough articles tend to gloss over the timescale required for these breakthroughs to become mainstream.

At this time I divide medical into three categories;

Chemical based medicine has been with us though history - until relatively recently, developments were often reached by lucky accident (Asprin/Viagra?) or trial and error by trying one chemical after another and seeing what it did.

I am hoping that increasing computer power to run molecular simulation programs might well turn up a few new blockbuster drugs in the medium term. A computer simulation can give an indication of the effects of very similar trial molecules and allow researchers to target the most promising candidates for real world testing.

Medical engineering is much younger and is progressing fast. Without going into detail, my view is that an engineered product such as an artificial heart (for argument's sake as it's basically a pump) would gain approval from the authorities more quickly than a gene edited animal's heart. At this time (and I'll add that I'm not an expert, more of a generalist) we can currently print metal bones and teeth with the eventual goal of being able to print a replacement organ from biological materials.

Gene editing is also moving forwards and gaining many headlines - the important question is when will it become profitable? There was a nice story this week about growing a dog's leg bone back - Wonderful news barring the fact that human trials won't start for a few more years.

I liken this situation to the transition from steam trains to diesel trains - The eventual winner was obvious from the outset, the transition took at least 30 years.

There is similar debate on the transition between petrol/diesel vehicles to hybrid and then on to full electric with the usual implications that this will happen far more quickly than it actually will. Just like steam vs diesel the winner is clear, the timescale isn't.

Glaxo are one element of the high yield section of my portfolio and not a company I pay that much attention to on a day to day basis. On that basis, I'm likely more relaxed about their future than someone who would invest for capital gains rather than a reasonable choice within an HYP.

Regards,

B.

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Re: GSK - Gone nowhere for 10 years but......

#107089

Postby FredBloggs » December 31st, 2017, 8:03 pm

Thanks for the thoughts. I went from quite warm to stone cold on GSK. When you look at the finances the company is eating itself paying the dividends. The share price performance reflects this is now my view. It is only a matter of time before GSK is a dividend cutter I think. I bought HSBC instead.

I would look again sub 1000p. But that is likely only after the divi is cut, I think.

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Re: GSK - Gone nowhere for 10 years but......

#107093

Postby Dod101 » December 31st, 2017, 8:39 pm

Well done Fred.
I have no doubt that HSBC is a better buy. Its share price is rising for many reasons and a modest dividend increase in 2018 (for the final or fourth interim) is not out of the question.

Dod

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Re: GSK - Gone nowhere for 10 years but......

#107292

Postby YeeWo » January 2nd, 2018, 10:42 am

After doing my 2017 numbers and publishing on TLF, I've done some serious thinking. Conclusion : Today I Sold 33% of my Jardine Lloyd Thompson stock (UP 41% in '17) and with the proceeds Purchased more GSK(DOWN 15% in '17). This has lowered my average holding price of GSK and works nicely as a prelude to either A) Selling GSK completely on bad news or B) Trimming GSK if the SP recovers a little (which I think it will). While I wait I think the GSK dividend isn't too shabby and I'm hoping it won't be cut........

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Re: GSK - Gone nowhere for 10 years but......

#111978

Postby jwillis3 » January 19th, 2018, 9:03 pm

Hi Princess B

I liken this situation to the transition from steam trains to diesel trains - The eventual winner was obvious from the outset, the transition took at least 30 years.


Agree it may take some time, but what previously took 30 years can now take 10 in todays internationally collaborative scientific world; and whilst an individual corporate may not profit, the cost saving to governments with socialised medicine and the insurers of private health care will drive this forward ( not to mention the benefit to humankind!). I suspect that the timescale required will be considerably shorter than that required for rigorous drug testing; after all a surgeon who wants to try a new surgical procedure requires very little approval. Its not too dissimilar.

Cancer was a near certainty at some point in the ever ageing population, and treatment an increasing possibility in the developing world. With radically altered treatment processes on the horizon, where do drug companies invest their time/money? They take on huge financial risks searching for blockbuster drugs, and even if they are able to find a drug more easily with computing power, the road to FDA approval remains a long and arduous one with no guarantees of success. All drugs have side effects and only years of animal and human testing reveal their severity - which then has to be balanced with the potential benefits - its an unavoidable necessity.

I honestly wouldn’t rely on the dividend - personally I think they are going to have to conserve all their resources while they rethink their strategy and their future place in medical developments.

Just my opinion!

Good luck

JW

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Re: GSK - Gone nowhere for 10 years but......

#111998

Postby BreakoutBoy1 » January 20th, 2018, 5:48 am

GSK is Carillion wearing a lab coat. High dividend, thin cover, pension obligations, lots of intangibles on the balance sheet, falling profitability when you strip out the never ending story of adjustments, no obvious plan to get out of the hole other than rely on the miracle of research. Where is the cash?

Good luck but I think Pfizer are nuts if they want to buy them.

ADrunkenMarcus
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Re: GSK - Gone nowhere for 10 years but......

#112023

Postby ADrunkenMarcus » January 20th, 2018, 10:53 am

For years GSK's returns have basically come from the dividend.

I held from 1998 to 2010 and the share price capital return was minus 3.6%. However, I made a total return of almost 41% (c. 3% CAGR - anything less would not match inflation!) and so it all came from dividends.

I bought again in 2015 and there hasn't really been any capital return. The share price is flat, notwithstanding a reasonable rise in 2016-17, and dividends (including a special) have provided all the return. I don't claim three years is a long period or a period to draw conclusions from: taking the April 2017 share price would look much better, but it does yo-yo.

A dividend cut would help free up resources for investment in the business which, invested wisely, would generate growth in future. We also need to be mindful of the debt obligations. I intend to sell my remaining GSK holding and reinvest the proceeds in one of my other shares with a stronger balance sheet and, I think, better longer term prospects for dividend growth (Kone) - at the cost of a lower initial dividend yield.

Best wishes


Mark.

Itsallaguess
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Re: GSK - Gone nowhere for 10 years but......

#112031

Postby Itsallaguess » January 20th, 2018, 11:21 am

ADrunkenMarcus wrote:
I intend to sell my remaining GSK holding and reinvest the proceeds in one of my other shares with a stronger balance sheet and, I think, better longer term prospects for dividend growth (Kone) - at the cost of a lower initial dividend yield.


One of the striking things that seems to be coming out of the CLLN story, for me anyway, is that the market seemed to give them plenty of time to sort themselves out, but after a long enough period that patience obviously wore thin and they were punished accordingly.

I think Glaxo might be in the middle of a similar period, where dividend-sustainability is a worry at its current level when compared to the ability of the company to continue paying it from its ongoing activities.

I've got to say that I don't sell what I consider to be core-holdings lightly, but Glaxo is the one share in my HYP (ignoring the political-risk holdings such as the utilities, that I'm biding my time on currently) that I feel is flashing a warning light at me, similar to the one I really should have taken notice of earlier with regards to my Carillion sale after the last profit warning.

Cheers,

Itsallaguess

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Re: GSK - Gone nowhere for 10 years but......

#112034

Postby Aprilfool62 » January 20th, 2018, 11:26 am

Hi

I hesitate to post this as it may show my ignorance but............You mention dividend cover being sparce. I checked Morningstar (perhaps this is seen as an unreliable website?) and it shows 2014 - 0.88, 2015 - 0.10 and 2016 - 0.41. The estimates for the next 2 years are 1.39 and 1.35 so this is much better. i thought anything over 1 was acceptable?
I am a long time holder of this share.

thanks

April

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Re: GSK - Gone nowhere for 10 years but......

#112044

Postby ADrunkenMarcus » January 20th, 2018, 11:53 am

Itsallaguess wrote:I've got to say that I don't sell what I consider to be core-holdings lightly, but Glaxo is the one share in my HYP (ignoring the political-risk holdings such as the utilities, that I'm biding my time on currently) that I feel is flashing a warning light at me, similar to the one I really should have taken notice of earlier with regards to my Carillion sale after the last profit warning.


There's certainly an issue of free cash flow and that it does not cover dividend payments, regardless of 'adjusted' earnings.

I think GSK either:
    maintains the dividend but at the cost of investment in the business and an increased debt load (which then imperils future dividend growth);
    decides to cut the dividend in order to invest in the business and not put further strain on the balance sheet; or
    is forced to cut the dividend by some circumstance.
None seem to be attractive options. I invest more for dividend growth than a HYP style (my portfolio's current yield is 2.4% or 2.9% for the dividend payers if we allow for the fact that a big chunk of it is in a non-dividend paying security), but I know there are a lot of debates surrounding tinkering, selling after dividend cuts (probably when the share price has fallen substantially) or - as in Carillion's case - even getting out in time before it implodes entirely.

In the first scenario, a HYP investor will get a continued high dividend (albeit being eroded steadily by inflation) with less potential for future growth (and it's also poor from a total return perspective); in the second and third, I think, they'll get a dividend cut anyway accompanied by a likely capital loss.

I regard Return on Capital Employed as a key measure of a company's quality. For GSK (using unadjusted earnings from annual reports), I see a ROCE of about 36% in 2000, peaking at 42.7% in 2006 and then declining to 13% in 2010, recovering to about 25-30% in 2011, 2012 and 2013; then 13.1% in 2014, 25.8% in 2015 and 6.5% in 2016. Return on Equity would likely look better because it excludes the higher debt levels.

GSK's operating margin fell from 26.2% in 2000 to 9.3% in 2016, although it was over 43% in 2015.

I would prefer to see the business generating a constantly high or moderately high and rising ROCE. The replacement I am considering, topping up my Kone holding, has a ROCE averaging about 40% in 2014-16. It's balance sheet is much stronger, too.

AbbVie did have a very good dividend yield for an American company, but it's been on a tear this year. Hindsight tells me it might have been better to sell out of GSK at around 1700p in April 2017 and then switch into AbbVie which was then less than $70 a share and is now over $100... :cry:

Best wishes


Mark.

ADrunkenMarcus
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Re: GSK - Gone nowhere for 10 years but......

#112045

Postby ADrunkenMarcus » January 20th, 2018, 11:56 am

There's no such thing as a silly question, April. :)

I think the issue is 'dividend cover' in terms of how we define it. We know, in cash terms, what the dividend costs. The problem is that earnings are not necessarily the same as cash flow and it's cash flow that is needed to pay the dividend. I don't have the cash flow figures handy but maybe someone else can assist.

Best wishes


Mark.


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