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Is Glaxo's Dividend at Risk?

GlaxoSmithKline's vaccine and consumer business should generate steady cash flows, but any mis-step would probably lead to a dividend cut, says Morningstar's Damien Conover

Damien Conover, CFA 5 February, 2015 | 9:49AM

GlaxoSmithKline (GSK) reported fourth-quarter results largely in line with both our and consensus expectations, and we don't expect any changes to our fair value estimate. Despite the deteriorating pricing environment for Glaxo's key respiratory franchise; we believe the company's wide moat remains intact, supported by a portfolio of branded drugs and a strengthening competitive position in the vaccine and consumer health businesses.

With the asset swap with Novartis – gaining vaccines, losing cancer drugs, and joint venturing on consumer products – likely to close in the first half of 2015, Glaxo is strengthening its competitive position by gaining scale in core areas while exiting a suboptimal position in the cancer market. However, as the quarterly results show, the growth potential in Glaxo's vaccine and consumer business is probably much lower than with the cancer drugs. Nonetheless, the vaccine and consumer business should generate more steady cash flows as generic competition in these areas is much less prevalent.

The cash flows from the strengthening consumer and vaccine businesses and a stabilising respiratory franchise are critical in supporting the dividend. Any mis-steps in these businesses will probably result in a dividend cut as the payout ratio is close to 85%. While we remain confident in the consumer and vaccine businesses, we are concerned that stabilisation in the respiratory franchise, 27% of total sales, may take longer than the one year that management is targeting.

Even though Glaxo returned the majority of its respiratory franchise to more favourable positioning on US payer formularies in 2015, we remain concerned that competitors will offer pricing concessions in 2016 to regain market share. Over the longer term, we believe Glaxo's respiratory franchise will stabilise and return to growth based on a leading drug portfolio and potentially positive outcomes studies.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
GlaxoSmithKline PLC1,714.20 GBX-1.45

About Author

Damien Conover, CFA  is an equity analyst and associate director at Morningstar.

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