That’s changed in the last month as Glaxo posted good earnings and received approval for a new drug treatment. This has caused the shares to cross 1,700 pence, and there might be more to come. There are still risks, of course, and even if the company continues to do well then the market can still be volatile. But I’m looking past the risks today to three reasons to continue to like Glaxo’s shares in the coming years.
Returning cash to shareholders
Let’s be honest. Most investors are initially drawn to GlaxoSmithKline plc (LON:GSK) for its above-average dividend yield. With the 10-year gilt offering less than 2%, it’s easy to understand why investors are drawn to Glaxo’s 4.2% dividend yield.
That dividend has been funded by Glaxo’s robust cash flows. With the steady sales of its over-the-counter health care products and a more diverse portfolio of pharmaceutical drugs, it looks like Glaxo’s cash flows should be there to continue funding its big dividend payout.
Over the last two years, investors have also benefited from Glaxo repurchasing more than 2 billion pounds worth of its own shares in each year. That is set to continue in 2013 as GlaxoSmithKline plc (LON:GSK) plans to repurchase another 1 billion to 2 billion pounds of its own shares. The benefit to shareholders here is indirect, but reducing the share count investors are seeing their ownership in the company grow. With consumer beverages Ribena and Lucozade up for sale, there is a good chance the share repurchases will continue, too.
The pipeline
Cash flow is the key to the current dividend, but it’s Glaxo’s pipeline of new drugs that is the key to maintaining the dividend and growing it in the future. Fortunately, Glaxo has a strong pipeline of new potential products that should help the company maintain its cash flow as respiratory treatment Seretide — also known as Advair — eventually sees competition from generic competitors.
Manufacturing difficulties have kept Seretide competitors away although the drug lost its patent protection in 2010. Management continues to believe that generic competition for Seretide won’t arrive in the U.S. until 2016 at the earliest, and perhaps even later than that. This should give GlaxoSmithKline plc (LON:GSK) the time to build out sales of Breo Ellipta, its new respiratory treatment that received approval in the U.S. earlier this month and is expected to receive approval in Europe later this year.
Breo Ellipta has the potential to be a blockbuster drug for Glaxo, but it’s the depth of Glaxo’s pipeline that impresses as Breo may be just the first of many drugs to see approval in the next few years. GlaxoSmithKline plc (LON:GSK) has also applied for approval for fellow respiratory treatment Anoro Ellipta and five other drugs — and has more than a half dozen more in phase 3 trials.
None of these drugs is expected to replace Seretide’s 5 billion pounds of sales on its own, but combined they could exceed Seretide’s sales and they give Glaxo a much more balanced product portfolio for the future.
Diversity built-in
For all of Glaxo’s strengths, the diversity of its business within health care may be where it really shines. Glaxo is primarily a pharmaceutical company, but it still gets 25% of its sales from over the counter health care products such as Sensodyne, Citrucel, and Horlicks, which has become a big seller in India of late.
The international spread of Glaxo’s sales is another way it provides diversification for investors. Most pharmaceutical and health care companies have a large focus on developed markets, but Glaxo’s sales are truly global with 33% of pharmaceutical sales in the U.S., 21% in Europe, 8% in Japan, and 20% in emerging markets. The rest come from specialty sales, and the previously mentioned consumer goods business is global in nature, too.
A good investment?
After their recent gains, GlaxoSmithKline plc (LON:GSK) shares suddenly look expensive at 20 times trailing earnings. I believe the market is betting on earnings growth from new product sales in the coming years and that Glaxo’s shares are more affordable than they appear at first glance. I also believe the market is probably right — do you think Glaxo’s shares warrant a rather lofty valuation?
The article 3 Reasons to Love GlaxoSmithKline originally appeared on Fool.com and is written by Nathan Parmelee.
Nathan Parmelee — lead advisor for Motley Fool Champion Shares PRO and a co-advisor for Share Advisor — owns shares of GlaxoSmithKline. The Motley Fool recommends GlaxoSmithKline.
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