Saturday, January 11, 2014

GlaxoSmithKline plc Dividend Stock Analysis

GlaxoSmithKline plc, together with its subsidiaries, discovers, develops, manufactures, and markets pharmaceutical products, over-the-counter medicines, and health-related consumer products worldwide. It offers pharmaceutical products in various therapeutic areas comprising respiratory, anti-virals, central nervous system, cardiovascular and urogenital, metabolic, antibacterials, oncology and emesis, dermatology, rare diseases, immuno-inflammation, vaccines, and HIV. The company provides prescription medicines to treat a range of conditions, including infections, depression, skin conditions, asthma, heart and circulatory disease, and cancer. It also produces paediatric and adult vaccines to prevent a range of infectious diseases, including hepatitis A and B; diphtheria, tetanus, and whooping cough; measles, mumps, and rubella; polio; typhoid; influenza; and bacterial meningitis. In addition, it provides consumer health products in oral care, nutritional, total wellness, and skin health areas. The company's total wellness
products include Panadol for the treatment of paracetamol-based treatment of headache and joint pain, fever, and cold symptoms; NicoDerm, NiQuitin CQ, and Nicabate for the treatmentof nicotine withdrawal as an aid to quitting smoking; ENO Tums, a rapid relief antacid; and oral care products comprise Sensodyne for the prevention of dental sensitivity; Polident, Poligrip, and Corega to improve comfort of fitted dentures and to clean dentures; Aquafresh for the prevention of caries, gum disease, and bad breath; and Parodontax to help stop bleeding gums and gum health. Its nutrition products include Lucozade for energy and hydration; and Horlicks and Maxinutrition for nutrition; and skin health products comprise Physiogel, a face and body care product for dry, sensitive, and irritated skin, and Oilatum, a soothing treatment for eczema and dry skin conditions. The company was founded in 1935 and is headquartered in Brentford, the United Kingdom. (http://finance.yahoo.com/q/pr?s=GSK.L+Profile)

Analysis

Current Yield and Dividend Growth

GlaxoSmithKline currently pays a dividend of GBP0.19 per quarter for a GBP0.76 annual dividend. At the close of market on Friday, January 10th GSK’s price per share was GBP16.05 (GBX1,604.80). This gives the stock a current dividend yield of 4.74%. Normally I look for a dividend yield of at least 3%, so I will be satisfied with this dividend yield from GSK. In 2003, GlaxoSmithKline paid an annual dividend amount of GBP0.40 per share. The dividend trend has been up each year as it now pays GBP0.76 annually per share. This gives GSK a 10 year annual compound dividend growth rate of 10.08%. GlaxoSmithKline has increased its dividend now 8 years in row. GlaxoSmithKline´s dividend growth rate has been okay on last 3, 5 and 10 years, 7.02%, 7.52% and 6.57%. 1 year growth rate is good 8.49%. GlaxoSmithKline normally pay dividend in January, April, July and October.

EPS Growth

GlaxoSmithKline's EPS has grown an average of 3.33% over the past 10 years, -0.55% in the past five years. The past three years, EPS has went down -5.43%, and in the past year it went down even -11.34%. GlaxoSmithKline's EPS of development in last years don´t seems to be very good. Analyst estimates for 5 years earnigs growth rate per annum are 6.79% (http://finance.yahoo.com/q/ae?s=GSK.L+Analyst+Estimates) If that will happen, GSK will be back on track to grow up it´s EPS.

Net Income

GlaxoSmithKline's net income has increased by an average of 1.49% over the past 10 years, went down -2.64% in the past five years. In last three years net income went down -6.20% and last year went down -13.23%. Net income trend looks similar to the EPS trend.

Revenue Growth

GlaxoSmithKline's revenue has increased 2.22% over the past 10 years, 3.06% in the last 5 years. In the last 3 years, profits went down -2.33%, last year revenue fell again by -3.49%.

Outstanding Shares

GlaxoSmithKline`s amount of shares has go down on last 10 years, except on year 2010 those increased a little bit, but after that it has continue to go down again. That I like, because less shares outstanding, my shares are giving me a larger portion of the earnings.


Payout Ratio

GlaxoSmithKline's dividend payout ratio has been in the past 10 years on average 73.31%. Last 12 moths period, the payout ratio was about 96%. This means that GlaxoSmithKline was distributed almost all of it`s profits to the shareholders. That seems to be very high for me.

ROE

GlaxoSmithKline's ROE has been around 57% over the past 10 years, which are very good.

Current Ratio

Current ratio measures the company's ability to meet short-term obligations. GlaxoSmithKline has current ratio 0.70 at the end of 2012. This means that the funds will be able to cover 70% of current liability obligations. I usually like the current ratio is greater than 1, so GlaxoSmithKline don´t look good in this case.

Net Profit to long term debt

This number tells me how many years it will take to pay off the current long term debt of the company by using all net profit into it. I want this ratio to be less than 5, because the company is able to pay for all long-term debt from less than five years and on my opinion then company don´t have too much debt. GlaxoSmithKline`s long term debt has been clearly under 5 times net profit on last 10 years, except on year 2010 that jumped over 9. In the last 10-year average is 2.56, last year it was 3.21.


Value

To found out share fair value I mainly use six different methods. (http://www.passive-income-pursuit.com/search/label/stock%20valuation%20method).

Average P/E Ratio

GlaxoSmithKline`s current P/E are 20.76, which are over to it`s historical 5 years average high (20.21) and also higher as 10 years average high (18.81). By calculating using estimated EPS 1.21 for year 2014 and the average 5-year low P/E ratio (15.17) shares fair value will be GBP18.36. Using the 10-year average low P/E ratio (14.28), fair value will be GBP17.28. Calculating with 5 year average P/E ratio (17.69), fair value will be GBP21.41, with 10 year average P/E ratio (16.55) fair value will be GBP20.02.

Average Dividend Yield

GlaxoSmithKline`s current annual dividend are GBP0.76. At the close of market on Friday, January 10th GSK’s price per share was GBP16.05. This gives the stock a current dividend yield of 4.74%. Average 5 years high dividend yields has been 6.46% and average 10 years high dividend yields has been 5.23%. Those dividend yields gives share fair value GBP11.77 for 5 and GBP14.52 for 10 years. Calculating with 5 year average yield 5.27%, fair value will be GBP14.43, with 10 year average yield 4.37%, fair value will be GBP17.37.

Average P/S Ratio

GlaxoSmithKline`s current P/S ratio are 2.94 with revenue estimates for year 2014 (26.9B). Average 5 years low P/S ratio are 1.91 and average 10 years low P/S ratio are 2.44. By calculating using estimated revenue for year 2014 and the average 5 years low P/S ratio fair value will be GBP10.63. Using the 10 years average low P/S ratio, fair value will be GBP13.34. Calculating with 5 year average P/S ratio (2.33), fair value will be GBP12.71, with 10 year average P/S ratio (2.85) fair value will be GBP15.57.

Discounted Cash Flow

Analyst estimates for 5 years earnings growth rate per annum are 6.79%. I will use on my calculation 66% of that, which are 4.48%. Then I assume that continue growth after 5 years will be 3%. I use discount rate 10% and EPS GBP0.79. Total I calculate for next 30 years. That will give me share fair value GBP10.75.

Discount Rates8%9%10%11%12%
NPV of Future EPS$13.35$11.94$10.75$9.75$8.89

Dividend Discount Model

GlaxoSmithKline`s current annual dividend are GBP0.76. I assume that GlaxoSmithKline will be able to grow dividends for the next 5 years at the lowest of the 1, 3, 5, or 10 year growth rates or 15%. In this case that would be 6.57%. Then I assume that after 5 years grow rate will be 5%. To calculate the value I used a discount rate of 10%. Total I calculate again for next 30 years. That will give me share fair value GBP13.02.

Discount Rate8%9%10%11%12%
NPV of Future Dividends$16.57$14.63$13.02$11.66$10.51

Future Price

GlaxoSmithKline has EPS 0.79 (ttm). When I calculate GlaxoSmithKline`s future price with analyst estimate for 5 years EPS growth (6.79)% and using low P/E ratio last 5 years, I came for price GBP18.51. That would give about 13% upside for GSK´s current price.

Conclusion

GlaxoSmithKline are a company, with 8 years continuing dividend increase in row now and I would like to add some healthcare company into my portfolio. Based on my analysis, I think GlaxoSmithKline are ​​currently a bit overvalued. GlaxoSmithKline`s growth development on last years don´t make me very convinced, also GSK`s payout ratio are nowadays very high, so there will not be much reserve for dividend increases in the future. Because of that, I am not prepared at this time to invest in it. GSK need to turn their growth to the positive, like it was before year 2009, then I might be interested on it.
Disclosure: I do not own any shares of GSK.



2 comments:

  1. Interesting analysis of GSK. Looks to me like their valuation is a bit high especially looking at the earnings trend over the past few years. Personaly, I'd prefer to see earnings going upwards.

    I've found with pharmaceutical companies that earnings tend to be a bit choppy as they have patents expiring and new patents (drugs) coming on the market. Also, takes a lot of R&D costs to run a pharmaceutical company. I'd like to have exposure to a drug company in my portfolio but haven't been able to find one that I like quite yet.

    ReplyDelete
  2. I agree with you, GSK are now overvalued with poor earnings growth on last years and very high payout ratio.
    DH

    ReplyDelete

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