GlaxoSmithKline keeps dividend but warns of ‘notable risks’

Shares fell after these results, but fundamentals are strong and there’s a nice dividend.

Investors relying on the dividend potential of drugs companies were given reason to be wary today after GlaxoSmithKline (LSE:GSK) shares fell sharply on the back of its latest guidance.

The blue-chip company's second-quarter results were disrupted by Covid-19, with demand for top-selling vaccines such as Shingrix severely impacted by the inability of people to reach healthcare professionals during government lockdowns.

Destocking in the pharmaceuticals and consumer healthcare divisions after the pandemic caused a spike in demand the previous quarter led to an overall 10% decline in sales to £7.6 billion.

Adjusted earnings per share fell 38% to 19.2p, although Glaxo stuck by its existing full-year guidance for the figure to fall by between 1% and 4% at constant exchange rates.

However, it warned that there were “notable risks” to the outcome for the rest of the year. In particular, much will depend on a recovery in vaccination rates in the United States during the current quarter.

Shares fell 3% as Glaxo warned that a three-month delay in the timing of the vaccinations recovery would have an impact on adjusted earnings per share (EPS) of up to five percentage points.

The current financial guidance was set in February and reflected a two-year plan for Glaxo to drive up investment in new products and in research and development, as well as to cover the costs of preparing for the separation of its Sensodyne-to-Panadol consumer division. 

All being well, investors can expect another 80p a share in dividends this year, including the 19p a share declared today. That annual outturn would extend a record going back to 2014.

Investors and fund managers are increasingly focused on the healthcare sector at a time when income has been decimated by a string of cuts and suspensions to FTSE 100 pay-outs in the wake of Covid-19. Glaxo and AstraZeneca (LSE:AZN) are currently among the five most popular dividend paying stocks across the 10 largest UK equity income funds and investment trusts.

Astra has stolen a march on its UK-listed rival, with better-than-expected first quarter profits and a robust outlook helping to make the Cambridge-based company the UK's most-valued stock at more than £110 billion. It is due to update on its second-quarter performance tomorrow.

Glaxo, meanwhile, is focused on its recent successes following promising data and positive regulatory reviews for new speciality medicines in HIV and oncology. Its pipeline now contains 35 medicines and 15 vaccines, with 75% of assets focused on immunology.

They also include its collaboration with Sanofi on a potential Covid-19 vaccine, for which the UK government has just agreed to buy up to 60 million doses. Glaxo said today that discussions were also underway with the United States and EU about similar deals. 

CEO Emma Walmsley said:

“The fundamentals of GSK’s business remain strong and we are maintaining good momentum on our strategic priorities.”

The value enhancing separation of the consumer healthcare division into a standalone business will leave Glaxo focused on the immune system, use of genetics and new technologies.

Shingles vaccine Shingrix has been one of its best-selling products, but weaker demand caused by Covid-19 lockdowns meant sales in the vaccines division fell 29% in the second quarter to £1.1 billion. Pharmaceuticals turnover was 5% lower at £4.1 billion and consumer healthcare 6% lower at £2.4 billion when excluding the recent addition of Pfizer (NYSE:PFE) brands such as Advil and Centrum after the two companies completed a joint venture deal last summer.