Is glaxo's dividend safe


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GlaxoSmithKline (NYSE: GSK) is one of the globe's biggest drug companies. The company generates more than $40 billion in annual sales and given its dividend yield is nearly 5%, its shares are often included in dividend investor's portfolios. Glaxo has a solid track record of dividend increases over the past five years; however, investors are right to wonder whether sliding sales tied to patent expiration may put Glaxo's streak in jeopardy.
In the following slideshow you'll learn whether I think Glaxo's dividend is safe and see how Glaxo's dividend matches up to its new consumer goods joint venture partner Novartis (NYSE: NVS) and its competitor AstraZeneca (NYSE: AZN).

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Is glaxo's dividend safe

  1. 1. Is GlaxoSmithKline’s Dividend Safe?
  2. 2. Is GlaxoSmithKline’s dividend safe?  An aging portfolio of drugs. • Flonase lost patent protection in 2006. – Sales continue to erode, dropping 14% to $150 million in 2013. • Hepatitis B drug Hepsera’s patent expires in September. – Sales fell 21% to $130 million. • Zeffix patent expired in 2010 (US) and 2011 (EU) – Sales dropped 26% to $247 million in 2013 • Requip patent expired in 2008. – Sales fell 18% to $170 million in 2013. • Paxil lost exclusivity in 2007. – Sales dropped another 16% to $387 million in 2013. • Arixtra lost exclusivity in 2011. – Sales declined 15% to $227 million in 2013. • Lovaza and Avodart will begin facing off against generics in the coming year. – Those drugs posted combined sales of more than $1.5 billion in 2013.  Shrinking margin. 2 big and important question marks hang over Glaxo’s dividend.
  3. 3. Patent expiration • Glaxo’s sales have struggled over the past five years as expired patents on a slate of drugs have outweighed new drug launches. As a result, revenue has slipped from $46 billion in 2010 to just under $41 billion in the past 12 months. While the weight of expiring patents has been heavy, a much bigger threat comes in 2016 when the patent expires on Advair’s Diskus inhaler. There’s considerable debate; however, over whether a true generic can be developed. Historically, the FDA had said that the same drug in a different inhaler is a different product due to the potential for varying doses. How this plays out for Glaxo is critical given that Advair notched sales of $8 billion last year, roughly 20% of Glaxo’s total revenue. First, let’s consider Glaxo’s patent calendar.
  4. 4. Shrinking margin Now, let’s take up the issue of falling margin. Operating margin has been weighed down as revenue has slipped, but help may be on the way. Glaxo has cut its R&D spending by more than $700 million since 2010 and its SG&A expenses have similarly fallen. For example, Glaxo’s year-over-year costs fell by more than $500 million in 2013. As a result of its cost savings plan, Glaxo expects to deliver 4% to 7% EPS growth this year.
  5. 5. Reasons for dividend optimism 1. New products and operational changes offer opportunity. 1. Six recent regulatory approvals. • Breo and Anoro for respiratory approved – Analysts project peak sales may reach $2.7 billion annually. • Tafinlar and Mekinist for melanoma approved. • Tivicay for HIV approved. • Eperzan for type-2 diabetes approved in April 2014. 2. The company is restructuring operations. • GlaxoSmithKline and Novartis are creating a consumer goods joint venture that merges their product portfolios. – $10 billion in combined sales. – Glaxo owns ~64%. • Novartis is purchasing GlaxoSmithKline’s oncology product portfolio. – Novartis’ is paying GlaxoSmithKline $16 billion. • GlaxoSmithKline is purchasing Novartis non-flu vaccine portfolio. – GlaxoSmithKline is paying Novartis’ $5.3 billion.
  6. 6. Reasons for dividend optimism • Glaxo’s trailing 12 month dividend payout has rebounded since the recession; however, over the past decade its payout has been more volatile than its new joint venture partner Novartis and AstraZeneca, which markets Advair competitor Symbicort. Advair lost market share to Symbicort in the first quarter as Express Scripts removed Advair from its formulary of reimbursable medicines.
  7. 7. Cash dividend payout Glaxo’s cash dividend payout ratio, a measure of how much of its operating cash after paying for capital expenses and preferred dividends, is 73%. That’s high, but is still less than both Novartis and AstraZeneca. A high ratio suggests that Glaxo’s dividend growth is hamstrung to its profit growth, suggesting investors will need new products to accelerate revenue and cost cutting to drive earnings.
  8. 8. Current yield Glaxo’ s current dividend yield of 4.8% is higher than both Novartis and AstraZeneca, but comes with risk, including the future threat to Advair Diskus sales. That suggests that investors enticed by Glaxo’s high yield will need to watch Glaxo’s sale forecasts and pipeline updates very closely over the next two years.
  9. 9. . The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.
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