Glaxo Dividend Cut Unlikely say Analysts

FTSE 100 dividend stock GlaxoSmithKline is expected to see growth in its consumer health and vaccines divisions into 2018

Damien Conover 26 October, 2017 | 11:47AM
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GlaxoSmithKline (GSK) reported third-quarter results largely in line with both Morningstar equity analysts and consensus expectations, and analysts don’t expect any major changes to our fair value estimate of £18.90, compared to the current share price of around £14.

We continue to view the stock as undervalued driven by steady growth in consumer health, vaccines, and HIV drugs, offsetting the expected 2018 US generic drug competition for respiratory drug Advair.

Analysts continue to view the firm’s significant competitive advantage - or wide moat - as secure, buoyed by brand power in the consumer group, innovation in drug and vaccine groups as well as some cost advantages layered into the vaccine segment. Consumer health saw flat growth in the quarter, drugs were up 2% in sales and vaccines were up 2% on the year.

We expect steady growth in the vaccine and consumer groups to help mitigate 2018 pressures in the drug group and help support the dividend, which is currently above 5%. While management has only confirmed a steady dividend through 2018, we believe a dividend cut is unlikely despite pressures the firms faces in 2018. However, concerns around the dividend will likely weigh on the stock price.

The respiratory drug challenges in the quarter will likely get worse in 2018, and the offsetting strength in HIV drugs will likely decelerate, setting up a challenging 2018 for Glaxo’s drug group. The flat respiratory growth in the quarter was largely due to US price declines for Advair, offset by new respiratory drug launches.

We expect respiratory drug pricing to fall further in 2018 with the likely entrance of generic Advair in the US. We don’t expect the new respiratory drug Trelegy Ellipta to offset these losses despite the drug’s superior efficacy to AstraZeneca’s (AZN) competitive drug Symbicort - a similar drug to Advair - as we believe payers will resist paying for the drug given the cheaper alternatives.

While HIV drug sales were up 13%, mitigating the respiratory challenges in the quarter, we expect increased competition from Gilead’s new drug, which has a similar efficacy to Glaxo’s Tivicay. In 2018 this competition will slow Glaxo’s HIV drug sales.

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Damien Conover  is a guest author