GlaxoSmithKline [LON:GSK] guaranteed its 5.4pc prospective dividend yield for the next three years last week. The FTSE 100-listed pharmaceutical company made the pledge as it outlined a strategy for the next five years. Chief executive Sir Andrew Witty said he expects the company to return to sales growth next year and pledged to maintain dividends at 80p until 2017. This encouraging announcement was enough to send the shares higher initially, but after the market digested news of the growing threat from cheap copycat drugs in the US and a reduction in the one-off return of cash to investors from £4bn to £1bn, the shares ended the week almost 4pc down.
Earnings per share declined by 16pc, to 17.3p, during the three months to the end of March compared with a year earlier. The fall was widely anticipated by the market, and the expectations for the full-year figure are for a similar fall, down about 18pc to 88p. The main problem for GSK is with generic versions of Advair, its important asthma treatment. Sales of Advair were £4.2bn last year, out of a group total of £23bn.Sir Andrew expects them to fall to as little as £300m within five years, leaving the company to manage the decline of its best-selling blockbuster drug.
Five year plan
GSK last week detailed a plan to cope with this rapid loss of revenue and profits, reversing plans to float its HIV drugs business ViiV Healthcare, in which it owns an 80pc stake.The company says encouraging sales growth means it will hold on to the stake. It will also conserve cash by retaining more of the money it received from Novartis as part of a £13.1bn asset swap. The previously announced £4bn special dividend was reduced to £1bn. The consumer healthcare business will also be a focus of rising profit margins. The deal with Swiss-based rival Novartis has already seen the group put greater focus on vaccines for diseases such as Ebola.
There is no doubting the challenges facing GSK, but it looks like the market has already priced a lot of the problems with the shares, which are currently trading on 17 times forecast earnings – a 15pc discount to European peers Novartis and Roche. For the long-term income investor, they still hold attractions. The shares offer a 5.4pc prospective dividend which is now guaranteed until 2017 and having largely missed out on the equity rally of the past six years, they remain reasonably priced. Sir Philip Hampton, who oversaw the turnaround of RBS, became chairman last week and could bolster the turnaround that is planned from next year. The shares are up 7pc from our tip of the year (Buy, £13.76, January 1) and we remain positive.