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GlaxoSmithKline Is More Than Just a 5% Dividend Income Play

Chris Lau

After sustaining an uptrend on the markets since bottoming in February, GlaxoSmithKline (NYSE:GSK) still has an attractive profile for income and value investors. The stock’s rock-solid dividend and its growth potential from a number of positive wins suggest GSK stock will still climb higher.

On May 29, GlaxoSmithKline and Innoviva (NASDAQ:INVA) submitted a regulatory application in Japan for a furoate/umeclidinium/vilanterol (FF/UMEC/VI) treatment. The once-daily Trelegy Ellipta  treats patients with chronic obstructive pulmonary disease (COPD). The drug had solid sales in the U.S. In the fourth quarter, net sales of Ellipta by GSK totaled $147.3 million, up 62 percent from $90.7 million in the previous year. The company also announced positive clinical data for its Anoro/Ellipta and Stiolto Respimat study in treating patients with COPD.

The FDA approved GSK’s Arnuity Ellipta product, which is a maintenance treatment of asthma in patients who are as young as 5 years old. The expanded use should lead to higher net sales for Glaxo.

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Glaxo capped May’s positive developments when it reported updated results for Columba, its long-term open-label study. Nucala (mepolizumab) treats patients suffering from severe eosinophilic asthma. The drug is already approved in the U.S. and has been in the market since November 2015. The study results bring good news for GSK and for those who suffer from asthma. The company did not make any mention of the adverse side effects, or if the safety profile is better than drugs offered by competitors like Regeneron Pharmaceuticals (NASDAQ:REGN).

On its conference call, Glaxo management expressed confidence.

Progress From First Quarter

GlaxoSmithKleine’s buyout of the Novartis (NYSE:NVS) stake in the Consumer Healthcare joint venture will enhance shareholder value over the long-term. The smart capital allocation will be accretive to earnings while strengthening cash flows. Whereas other pharmaceutical companies could make unpredictable buyouts that do not have any synergies with their business, Glaxo is strengthening its core Pharma R&D pipeline.

Glaxo faces a number of headwinds in its business. The Consumer segment grew by only 2 percent, although underlying growth is closer to 4 percent. This year, growth will stagnate in the low single-digits. Investors should not expect the company to exceed that target because all of its power brands are growing in the high single-digits. Besides, Glaxo is already growing market share. The Novartis buyout will not improve its margin until around 2020. Once the Novartis buyout is fully integrated into the business, management will have a better idea on its new margin outlook in the years ahead.

Earnings per share will turn positive year after year, starting in 2019.

GlaxoSmithKline (GSK)

Pricing pressures in inhaled corticosteroid (ICS) and long-acting beta agonists (LABA) are another headwind. Glaxo aims to offset the falling profitability through new product launches. The release of an Advair generic also adds weight to the importance of new product releases. Glaxo does not know yet how much impact an Advair generic will have on overall results. In its next quarterly report, management may have enough market data and sales numbers to assess the damage.

GSK Stock Valuation

Few analysts have a price target on GSK stock and those who do set a target of $40-$49.  The analysts also rank the stock as either a “buy” or “hold.”  Conversely, users on finbox.io have financial models on GSK stock that peg an average fair value of $48.36.

Assume revenue falls in Fiscal Year 2018 but grows between 0 percent to 5 percent through FY 2022 in the  5-year DCF Growth Exit model.

Input Projections Fiscal Years Ending Dec-17 Dec-18 Dec-19 Dec-20 Dec-21 Dec-22 Revenue 38,904 36,959 36,959 37,698 39,206 41,166 % Growth 2.9% -5.0% 0.0% 2.0% 4.0% 5.0% EBITDA 7,744 7,392 8,500 9,047 9,801 9,880 % of Revenue 19.9% 20.0% 23.0% 24.0% 25.0% 24.0%

Source: finbox.io

GlaxoSmithKleine’s nearly 20 percent rebound from yearly lows may scare value investors away, but the dividend yield of around 5.3 percent will reward the buy and hold investor. As the company absorbs the Novartis unit, cash flow will very likely lead to dividend hikes annually.

Disclosure: Author owns shares of Innoviva.

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