Novartis Deal Will Strengthen Glaxo's Dividend say Analysts

Glaxo buys full control of consumer joint venture from Novartis, strengthening cash flows for the dividend

Damien Conover, CFA 28 March, 2018 | 7:36AM
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Glaxo’s (GSK) acquisition of the Novartis (NOVN) portion in its consumer healthcare joint venture should strengthen Glaxo’s cash flow generation and further support its dividend. But Morningstar equity analysts don’t expect any major impacts to the fair value estimates for either company. With the acquisition, Glaxo further entrenches itself in the consumer healthcare market, taking full ownership of the joint venture, up from the current 63.5% stake.

With Glaxo’s further entrenchment in consumer healthcare, we expect the brand power around several brands to help reinforce its wide moat. For Novartis, we don’t expect any impact on the firm’s wide moat. We believe the patent protection and pricing power around Novartis’ drug division support the core pillar of its wide moat. Further, we expect the likely redeployment of the deal proceeds toward acquiring more drug assets will reinforce the solid competitive positioning of Novartis’ drug group.

Glaxo’s acquisition should strengthen the cash flows for the firm at reasonable acquisition price. The higher cash flows should reduce concerns about a potential dividend cut that have weighed on the stock. We expect close to three percent higher earnings growth in 2019 due to acquisition. The faster growth should move the company into a more manageable position in paying the dividend. Further, with no premium applied to the valuation of the Novartis’ ownership due to the structure of the initial agreement, we believe Glaxo gained the assets at a fair value.

Turning to Novartis, armed with the joint venture proceeds and the potential to sell its Roche holdings for close to $14 billion and Alcon assets for close to $20 billion, we believe Novartis is positioned well to make a major acquisition. Given the firm’s lagging position in immuno-oncology, we believe Bristol Myers represents an attractive target for the firm.

Investment Thesis

As one of the largest pharmaceutical companies, GlaxoSmithKline has used its vast resources to create the next generation of healthcare treatments. The company's innovative new product lineup and expansive list of patent-protected drugs create a wide economic moat, in our opinion.

The magnitude of the company's reach is evidenced by a product portfolio that spans several therapeutic classes, as well as vaccines and consumer goods. The diverse platform insulates the company from problems with any single product. 

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.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
GSK PLC1,497.50 GBX-1.29Rating
Novartis AG Registered Shares99.53 CHF-0.53Rating

About Author

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

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