GlaxoSmithKline 1st quarter results

GlaxoSmithKline a global healthcare company that develops, manufactures and markets pharmaceutical products, including vaccines, over-the-counter (OTC) medicines and health-related consumer products.  I have a holding in my income portfolio (epic code: GSK). 

GlaxoSmithKline reported their first quarter results today and a change to their return of capital plan (previously commented on here).

Turnover for quarter 1 increased by 0.2% to £5.6bn, on a like-for-like basis turnover declined by -1%, with Pharmaceuticals down -5%, Vaccines up 3% and Consumer Healthcare up 8%.

Adjusted operating profit decreased by -14.7% (-14% at constant exchange rates) to £1.3bn and reported operating profit which also included the gain on the sale of the vaccine business to Novatis was £9.2bn.  Adjusted EPS decreased -17.6% (-16% at CER) to 17.3p, with reported EPS at 166.4p.

A quarterly dividend of 19p has been declared and management stated that they expect to pay a dividend of 80p for each of the next three years (2015-2017).

During the period free cash flow was an outflow of -£28m, compared to £512m generated last year. Obviously the Novartis deal had a substantial effect on net debt, so that at the period end it stood at £8.1bn compared to £14.3bn at the end of last year; likewise gearing was substantially improved from 337% to 109%.  There is still a £1.9bn tax bill to be paid on the profit resulting from the Novartis deal, but clearly Glaxo's financial position is much healthier. 

The company plans to pay a special dividend of approximately £1bn (20p per share) with the quarter 4 2015 dividend, instead of the previously announced return of capital (ROC) of £4bn (see here).  Given Glaxo's debt position and commitments (possible future transactions relating to ViiV and the Consumer Healthcare JVs), this is a better use of the proceeds from the Novartis deal and if I need the additional 60p per share that the ROC would have provided, I can always sell the required shares, to leave myself in a similar position.  The difference is that under current legislation the original ROC would have been treated as income, the same as the special dividend, but any sale of shares will be treated as capital gains.

With respect to the outlook management have stated, that in 2015 core EPS is expected to decline at a percentage rate in the high teens on a CER basis, this is due to continued pricing pressure on Advair in US and Europe, the dilutive effect of the transaction and the inherited cost base of the Novartis businesses.  In 2016 they expect to see a significant recovery in Core EPS with percentage growth expected to reach double-digits.  They also expects revenues to grow at a CAGR of low-to-mid single digits on a CER basis over the five year period 2016-2020.

On balance I prefer the special dividend and Glaxo's balance sheet being in a much healthier position to protect future dividend payments.  I am not happy that the next three year's of dividends are flat, but I'm hoping that as the prospects improve this may change, but their commitment not to cut the dividend over the period is on balance a positive statement.