GlaxoSmithKline PLC (GSK)

[monabri]

"Distribution policy for new GSK to be implemented in 2022 to support growth and investment. A ggregate distributions expected to be lower than at present"

("A ggregate" !)

[dealtn]

"Distribution policy for new GSK to be implemented in 2022 to support growth and investment. A ggregate distributions expected to be lower than at present"

("A ggregate" !)

"At our Biopharma investor update in June we plan to set out in detail the growth prospects and financial outlook for the new Biopharma company over the medium term, including a detailed review of the pipeline we have been building over recent years. Alongside these we will provide details of a new distribution policy which reflects the optimised capital structure and investment priorities focused on delivering sustainable long-term shareholder value. We anticipate that this new policy will deliver competitive and attractive returns informed by appropriate earnings pay-out ratios through the investment cycle well covered by Free Cash Flow and, importantly, expected growth potential. We expect that aggregate distributions for GSK will be lower than at present. This new policy will be implemented for dividends paid in respect of 2022."

[simoan]

"Distribution policy for new GSK to be implemented in 2022 to support growth and investment. A ggregate distributions expected to be lower than at present"

("A ggregate" !)

"At our Biopharma investor update in June we plan to set out in detail the growth prospects and financial outlook for the new Biopharma company over the medium term, including a detailed review of the pipeline we have been building over recent years. Alongside these we will provide details of a new distribution policy which reflects the optimised capital structure and investment priorities focused on delivering sustainable long-term shareholder value. We anticipate that this new policy will deliver competitive and attractive returns informed by appropriate earnings pay-out ratios through the investment cycle well covered by Free Cash Flow and, importantly, expected growth potential. We expect that aggregate distributions for GSK will be lower than at present. This new policy will be implemented for dividends paid in respect of 2022."

I have to admit I don't understand all the fascination with the dividend; it's not the only reason to hold GSK shares. It's been pretty obvious the dividend was going to go purely by the fact it's been held for so long, so no need for any teeth gnashing and wailing.

I am deeply interested in building a position currently, attracted by the strong negative relative strength (reversion to the mean is a powerful force over time) and the fact it is a quality business with double digit returns on capital and operating margins on a forward PER <12. Even today after a poor year it has generated about 100p per share of free cash putting it on a FCF yield of 7.6% at the current 13 quid and a bit share price. That sounds a bargain to me in a zero interest rate world.

I realise it's a bit of a contrarian view but a demerger of the company makes sense because as separate companies the individual parts would be much more highly valued by the market. Look at the consumer division standalone and put it on a similar rating to Reckitt Benckiser or Unilever, for instance... As ever, all that is discussed here is the flipping dividend, when people should spend more time analysing the value that lies within.

All the best, Si

[daveh]

"Distribution policy for new GSK to be implemented in 2022 to support growth and investment. A ggregate distributions expected to be lower than at present"

("A ggregate" !)

"At our Biopharma investor update in June we plan to set out in detail the growth prospects and financial outlook for the new Biopharma company over the medium term, including a detailed review of the pipeline we have been building over recent years. Alongside these we will provide details of a new distribution policy which reflects the optimised capital structure and investment priorities focused on delivering sustainable long-term shareholder value. We anticipate that this new policy will deliver competitive and attractive returns informed by appropriate earnings pay-out ratios through the investment cycle well covered by Free Cash Flow and, importantly, expected growth potential. We expect that aggregate distributions for GSK will be lower than at present. This new policy will be implemented for dividends paid in respect of 2022."

I have to admit I don't understand all the fascination with the dividend; it's not the only reason to hold GSK shares. It's been pretty obvious the dividend was going to go purely by the fact it's been held for so long, so no need for any teeth gnashing and wailing.

I am deeply interested in building a position currently, attracted by the strong negative relative strength (reversion to the mean is a powerful force over time) and the fact it is a quality business with double digit returns on capital and operating margins on a forward PER <12. Even today after a poor year it has generated about 100p per share of free cash putting it on a FCF yield of 7.6% at the current 13 quid and a bit share price. That sounds a bargain to me in a zero interest rate world.

I realise it's a bit of a contrarian view but a demerger of the company makes sense because as separate companies the individual parts would be much more highly valued by the market. Look at the consumer division standalone and put it on a similar rating to Reckitt Benckiser or Unilever, for instance... As ever, all that is discussed here is the flipping dividend, when people should spend more time analysing the value that lies within.

All the best, Si

Remind how is the divestment of the consumer business happening - are present shareholders gaining a holding in the consumer business or is it being IPO'd (or has it not been announced yet)?

With the consumer business being hived off it is to be expected that the dividend for the pharma company will reduce - less income and presumably a more capital intensive company with the need to invest in R&D to keep the drug pipeline filled. The consumer business is the one that should have fairly steady cash flow and could pay a good yield.

[simoan]

"At our Biopharma investor update in June we plan to set out in detail the growth prospects and financial outlook for the new Biopharma company over the medium term, including a detailed review of the pipeline we have been building over recent years. Alongside these we will provide details of a new distribution policy which reflects the optimised capital structure and investment priorities focused on delivering sustainable long-term shareholder value. We anticipate that this new policy will deliver competitive and attractive returns informed by appropriate earnings pay-out ratios through the investment cycle well covered by Free Cash Flow and, importantly, expected growth potential. We expect that aggregate distributions for GSK will be lower than at present. This new policy will be implemented for dividends paid in respect of 2022."

I have to admit I don't understand all the fascination with the dividend; it's not the only reason to hold GSK shares. It's been pretty obvious the dividend was going to go purely by the fact it's been held for so long, so no need for any teeth gnashing and wailing.

I am deeply interested in building a position currently, attracted by the strong negative relative strength (reversion to the mean is a powerful force over time) and the fact it is a quality business with double digit returns on capital and operating margins on a forward PER <12. Even today after a poor year it has generated about 100p per share of free cash putting it on a FCF yield of 7.6% at the current 13 quid and a bit share price. That sounds a bargain to me in a zero interest rate world.

I realise it's a bit of a contrarian view but a demerger of the company makes sense because as separate companies the individual parts would be much more highly valued by the market. Look at the consumer division standalone and put it on a similar rating to Reckitt Benckiser or Unilever, for instance... As ever, all that is discussed here is the flipping dividend, when people should spend more time analysing the value that lies within.

All the best, Si

Remind how is the divestment of the consumer business happening - are present shareholders gaining a holding in the consumer business or is it being IPO'd (or has it not been announced yet)?

With the consumer business being hived off it is to be expected that the dividend for the pharma company will reduce - less income and presumably a more capital intensive company with the need to invest in R&D to keep the drug pipeline filled. The consumer business is the one that should have fairly steady cash flow and could pay a good yield.

Pfizer have mentioned an IPO at some point and GSK mentioned a timescale of two years, a year ago. Either way the whole of GSK is on a Price to Sales Ratio (PSR) of 2 whilst even Reckitt Benckiser is on PSR of 3.3, and Unilever 3.9. We know today the historic PER is 11.3 whilst it is 19-20 for RB. and ULVR.

For full disclosure I couldn't resist at 1301p and have just opened a position on a 2-3 year view.
All the best, Si

[dealtn]

... As ever, all that is discussed here is the flipping dividend, when people should spend more time analysing the value that lies within.

Not by me. I have no interest in its dividend (or any other company's come to that). I am more than happy for this Board to be about "news" and pontification over any Dividend to occur elsewhere.

[Dod101]

Simoan may be right in his analysis but it would be a huge act of faith to buy now. The share price has fluctuated in a narrow band between about £13.50 to about £16.50 over the last 6/7 years and today it is about the lowest it has been in that time. The reason shareholders are interested in the dividend is because there has been nothing else by way of return. Even the dividend has been held for at least the last 4 years and the year prior to that it was cut.

Dod

[simoan]

... As ever, all that is discussed here is the flipping dividend, when people should spend more time analysing the value that lies within.

Not by me. I have no interest in its dividend (or any other company's come to that). I am more than happy for this Board to be about "news" and pontification over any Dividend to occur elsewhere.

Hi dealtn,

Yes, sorry! I didn't mean you

All the best, Si

[simoan]

Simoan may be right in his analysis but it would be a huge act of faith to buy now. The share price has fluctuated in a narrow band between about £13.50 to about £16.50 over the last 6/7 years and today it is about the lowest it has been in that time. The reason shareholders are interested in the dividend is because there has been nothing else by way of return. Even the dividend has been held for at least the last 4 years and the year prior to that it was cut.

Dod

Aren't all share purchases a huge act of faith? Or are you saying you can tell the future? However, those where there is hidden value on low ratings need somewhat less faith than those where a share is priced to perfection, of which there are many examples currently. GSK came up on my negative relative strength filter a month ago and so it is something I've had my eye on. If todays announcement has caused income investors to dump the shares, then all the better.

All the best, Si

[Dod101]

Simoan may be right in his analysis but it would be a huge act of faith to buy now. The share price has fluctuated in a narrow band between about £13.50 to about £16.50 over the last 6/7 years and today it is about the lowest it has been in that time. The reason shareholders are interested in the dividend is because there has been nothing else by way of return. Even the dividend has been held for at least the last 4 years and the year prior to that it was cut.

Dod

Aren't all share purchases a huge act of faith? Or are you saying you can tell the future? However, those where there is hidden value on low ratings need somewhat less faith than those where a share is priced to perfection, of which there are many examples currently. GSK came up on my negative relative strength filter a month ago and so it is something I've had my eye on. If todays announcement has caused income investors to dump the shares, then all the better.

All the best, Si

Yes all share purchases are to a greater or lesser extent an act of faith. I hold Glaxo and will not be selling them but like much of the UK market no one seems to like them much, and their history may have something to do with that. Unlike some companies, they pay very little attention to their shareholders and to that extent scarcely deserve much support. I think that, all in all, buying Glaxo at the moment is a bigger act of faith than usual.
Good luck in your purchase because if you are correct any rerating will help me as well. I am not holding my breath though.

Dod

[simoan]

Simoan may be right in his analysis but it would be a huge act of faith to buy now. The share price has fluctuated in a narrow band between about £13.50 to about £16.50 over the last 6/7 years and today it is about the lowest it has been in that time. The reason shareholders are interested in the dividend is because there has been nothing else by way of return. Even the dividend has been held for at least the last 4 years and the year prior to that it was cut.

Dod

Aren't all share purchases a huge act of faith? Or are you saying you can tell the future? However, those where there is hidden value on low ratings need somewhat less faith than those where a share is priced to perfection, of which there are many examples currently. GSK came up on my negative relative strength filter a month ago and so it is something I've had my eye on. If todays announcement has caused income investors to dump the shares, then all the better.

All the best, Si

Unlike some companies, they pay very little attention to their shareholders and to that extent scarcely deserve much support. I think that, all in all, buying Glaxo at the moment is a bigger act of faith than usual.

Dod

I don't get this? If your only criteria was directors being interested in shareholder value you'd better exclude investment in any FTSE 100 company. GSK is no different to any other. I happen to like companies which pay attention to shareholder returns which is why I'm very underweight FTSE 100 companies and very overweight mid and small caps. Having said that the directors of GSK have made some meaningful in-market share purchases in the past 12 months using their own money, not just sitting there issuing themselves share options like most other FTSE100 boards. And they've held the dividend for years when it would have been easier to cut it, especially if they were that disinterested in their shareholders.

All the best, Si

[Bouleversee]

Following Dod's comment about GSK on the AZN board, this rather damning article by Bearbull of Investors' Chronicle may be of interest:

https://www.investorschronicle.co.uk/ne ... dium=email

[Darka]

Couldn't agree more with the article.

I won't sell for obvious reasons but will wait and hopefully they will be bought up at some premium and then I can forget all about them.

[Dod101]

Following Dod's comment about GSK on the AZN board, this rather damning article by Bearbull of Investors' Chronicle may be of interest:

https://www.investorschronicle.co.uk/ne ... dium=email

Thanks for that article. I had not seen it. I have a good deal of respect for the BearBull column and had not realised just how small Glaxo is nowadays. Based on its analysis I guess I should keep them for the time being but I am really tempted to sell.

Dod

[simoan]

Following Dod's comment about GSK on the AZN board, this rather damning article by Bearbull of Investors' Chronicle may be of interest:

https://www.investorschronicle.co.uk/ne ... dium=email

Thanks for that article. I had not seen it. I have a good deal of respect for the BearBull column and had not realised just how small Glaxo is nowadays. Based on its analysis I guess I should keep them for the time being but I am really tempted to sell.

Dod

I went to the trouble of putting a table on a separate GSK thread on Share Ideas the other day that showed exactly how small the company is compared to its peer group and how undervalued it is on a number of metrics commonly used for comparing companies in the same sector. I spent a few hours doing a sum-of-parts valuation too, but chose not to share it as no-one seemed the least bit interested in real analysis. Once you stop talking about the flipping dividend people's ears seem to close up on TLF.

FWIW I didn't find the IC article that interesting or useful because the past is not of much use to an investor - it's only the future that matters. And the article was heavily biased by the fact the author is a long-term disaffected holder who made the mistake of not selling despite having lost faith in management a number of years ago. That's really not of much use to potential new investors and they are doing their readers a disservice. All we know is that "BearBull" seems to be a rubbish investor who holds shares for grim death hoping they'll come good and ignoring the evidence to the contrary staring them in the face.

All the best

[scrumpyjack]

Glad I got rid of them a while ago, but it does demonstrate one of Pharma's big problems. Patent expiry. They spend loads on research and development, writing most of it off as abortive, then find a drug that works and make hay for a few years. Then the patent expires, the profits evaporate and it's back to square one. That was Zantac for Glaxo. For Pfizer it was Viagra which is why they went after AZN's development pipeline.

I can't think of any other industry where the value of intellectual property so expensively built up then self-destructs automatically!

[Dod101]

Following Dod's comment about GSK on the AZN board, this rather damning article by Bearbull of Investors' Chronicle may be of interest:

https://www.investorschronicle.co.uk/ne ... dium=email

Thanks for that article. I had not seen it. I have a good deal of respect for the BearBull column and had not realised just how small Glaxo is nowadays. Based on its analysis I guess I should keep them for the time being but I am really tempted to sell.

Dod

I went to the trouble of putting a table on a separate GSK thread on Share Ideas the other day that showed exactly how small the company is compared to its peer group and how undervalued it is on a number of metrics commonly used for comparing companies in the same sector. I spent a few hours doing a sum-of-parts valuation too, but chose not to share it as no-one seemed the least bit interested in real analysis. Once you stop talking about the flipping dividend people's ears seem to close up on TLF.

FWIW I didn't find the IC article that interesting or useful because the past is not of much use to an investor - it's only the future that matters. And the article was heavily biased by the fact the author is a long-term disaffected holder who made the mistake of not selling despite having lost faith in management a number of years ago. That's really not of much use to potential new investors and they are doing their readers a disservice. All we know is that "BearBull" seems to be a rubbish investor who holds shares for grim death hoping they'll come good and ignoring the evidence to the contrary staring them in the face.

All the best

I appreciated your work on the other thread but it did not convince me. Apart from anything else, a mismatched valuation (as you see it) can persist for a very long time. Many people on these Boards are, like me, primarily income investors, rightly or wrongly, although I am moving slowly into a more of a total return one. I find the past history very helpful in deciding about a share because it illustrates the culture which I find of fundamental importance. The problem I have with the article is that to a large extent the only reason he can find for holding Glaxo is the prospect of a takeover following the split (and that of course may never happen)

Dod

[simoan]

Glad I got rid of them a while ago, but it does demonstrate one of Pharma's big problems. Patent expiry. They spend loads on research and development, writing most of it off as abortive, then find a drug that works and make hay for a few years. Then the patent expires, the profits evaporate and it's back to square one. That was Zantac for Glaxo. For Pfizer it was Viagra which is why they went after AZN's development pipeline.

I can't think of any other industry where the value of intellectual property so expensively built up then self-destructs automatically!

Hi Scrumpyjack,

I completely agree. The medium to long-term economics of all that expensive R&D cost is not great. Quite unlike a technology company where the payback is so much greater without a patent cliff. The exception is where further drug development leads to a new improved product gaining further patent protection but this can't be assumed.

However, not all pharma companies are created equal. It's funny, but I was doing some analysis of GSK the other day and whilst looking at the peer group I noticed Amgen. Amgen currently has 41 drugs in Phase III and of the existing drugs none are huge blockbusters, so revenue is spread across a number of different income streams. To me, this is far better than where revenues come from just 1 or 2 blockbuster drugs that have a patent time-bomb ticking. I bought some Amgen after further analysis!

All the best, Si

[simoan]

I appreciated your work on the other thread but it did not convince me. Apart from anything else, a mismatched valuation (as you see it) can persist for a very long time. Many people on these Boards are, like me, primarily income investors, rightly or wrongly, although I am moving slowly into a more of a total return one. I find the past history very helpful in deciding about a share because it illustrates the culture which I find of fundamental importance. The problem I have with the article is that to a large extent the only reason he can find for holding Glaxo is the prospect of a takeover following the split (and that of course may never happen)

Dod

I don't agree. With GSK there is a clear catalyst to realise the value within the next 2-3 years because next year the Consumer division will be spun-off. It is clear the management have fully committed to this process.

I made the point on the other thread that GSK will very likely not exist in 3 years time in any form - just about the only thing I agreed with in the IC article. It will be eaten up by it's peer group and this is the catalyst for a re-rating and why doing a sum-of-parts valuation makes sense. Even if you write off the post-patent "Established" drug revenue, put the consumer healthcare division on a similar rating to Reckitt Benckiser (which is not exacty flavour of the month itself), and award the remaining New Pharma products and Vaccine business a peer average multiple you get a sum-of-parts valuation of about £20. I'm not saying the share price will ever get to that but it shows the safety of margin we're looking at.

I can see that income investors will have a downer on the company, and therein lies the opportunity for those who can see beyond the dividend. I won't repeat my thoughts on income investing but they are fully aligned with Terry Smith's

All the best, Si

[dealtn]

2 site closures.

https://www.bbc.co.uk/news/uk-england-56027122