Interactive Investor

GlaxoSmithKline: aggressive growth to compensate for dividend cut 

23rd June 2021 15:06

by Graeme Evans from interactive investor

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Reaction to Glaxo’s eagerly awaited strategy update has been largely positive despite bad news for income seekers.

Emma wamsley glaxo

GlaxoSmithKline (LSE:GSK) shareholders are to see a 31% cut in dividend income as the drugs giant embarks on its strategy for delivering a “step-change” in growth in the next decade.

The Glaxo divi is one of the most prized in the FTSE 100 index, having been at 80p a share since 2014 for a current yield of 5.7% and pay-out ratio representing 80% of forecast earnings.

It will be reduced in 2022 for the first time in the 21 years since the merger of Glaxo Wellcome and SmithKline Beecham, as chief executive Dame Emma Walmsley (pictured) looks to focus resources on ways to remedy the company's lacklustre share price performance.

In exchange for the dividend re-set, shareholders were today promised annual sales growth of more than 5% and operating profit growth of 10% between 2021 and 2026.

Dame Emma's overall ambition is sales of £33 billion by 2031 as Glaxo prioritises investment around vaccines and speciality medicines in oncology, HIV and hard-to-treat diseases.

City investors applauded the plans, although today's 3% rise in share price to 1,439p still only takes the company back to levels last seen in November.

The guidance for a dividend of about 55p next year includes a final contribution from the consumer healthcare division being demerged next year.

The remaining “New GSK” business is expected to adopt a progressive dividend policy targeting a pay-out ratio equivalent to about 40%-60%, starting with 45p a share in 2023. The planned 31% reduction to 55p equates to a yield of 3.9%, with the subsequent 45p for the New GSK business yielding 3.2%.

interactive investor’s head of equities Richard Hunter said: “Even at the lower levels, the yields remain relatively attractive given the current interest rate backdrop.

“By rebasing the dividend, this gives the company some flexibility towards achieving its new progressive policy, while also freeing up capital to help finance its wider ambitions to invest in the company’s product pipeline.”

Glaxo will demerge 80% of its majority stake in the Sensodyne and Panadol consumer joint venture to Glaxo shareholders, with the new shares set for a premium listing in London.

The separation of a business that generated annual sales of more than £10 billion last year should take place by the middle of 2022 and lead to an £8 billion windfall payment to New GSK.

The narrower focus will enable New GSK to further enhance an existing pipeline of 20 vaccines and 42 medicines, many of which it says are potential best or first in class opportunities.

Glaxo in a better place

Dame Emma believes the company is now much better placed than when she was appointed chief executive in 2017, having overseen a “huge transformation” that has included the strengthening of R&D and improvements in commercial execution.

She added: “We are now ready to deliver a step-change in growth for New GSK and unlock the value of Consumer Healthcare. 

“New GSK is exceptionally well positioned to positively impact people's health and to deliver strong performance and value to shareholders through the decade."

Having set out her strategy for improving Glaxo's performance, attention will now turn to the reaction of activist investor Elliott Management.

Little is known about Elliott's intentions towards Glaxo after it bought a significant stake earlier this year. However, it should be remembered that Elliott was in the background when rare disease specialist Alexion Pharmaceuticals sold itself to AstraZeneca for $39 billion in December.

New York-based Elliott first took a stake in Alexion in 2017 and spoke out last May in opposition to the chief executive's plan to diversify its research pipeline, adding that the company should be considering an outright sale.

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