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Will Glaxo's Restructuring Post-Novartis, Breathe New Life Into Share Price?

GSK 031616 39.66 Yld 5.54 PE 8.03

Company Profile

GlaxoSmithKline plc. (GSK) is a healthcare company that researches and develops pharmaceuticals, vaccines and consumer healthcare products. The Company operates in two segments: Pharmaceuticals and Vaccines, and Consumer Healthcare. The Pharmaceuticals segment develops and makes medicines to treat a range of acute and chronic diseases. Its human immunodeficiency virus (HIV) business is managed through ViiV Healthcare. GSK's Vaccines has a portfolio of over 30 paediatric, adolescent, adult travel vaccines. GSK's Established Products Portfolio includes over 50 off-patent products, as well as its branded generics business and other local products. The Consumer Healthcare business develops and markets products in four categories, such as wellness, oral health, nutrition and skin health. Its brands include Sensodyne, Panadol, Horlicks, Polident, Paradontax, Tums, ENO, NiQuitin/Nicorette, Abreva, Zovirax and Aquafresh. It operates in the United Kingdom, the United States, Belgium and China.  (Source:  Google Finance)

For more info: http://www.gsk.com/en-gb/investors/

 

Quick Assessment

I was evaluating Eli Lilly & Co (LLY) when I came across (GSK).  I quickly determined that (LLY) was too rich for my blood and started looking at the numbers of some of their competitors.  Of course, there were the usual; (JNJ), (PFE), and (MRK) which are all included in our "Divi-X" Index, but the thing that immediately leapt out at me was (GSK)'s incredibly low P/E of just around eight when all of it's peers where hovering somewhere around the mid-twenties.  I don't know about you, but when I see something like that, my first reaction is a bit of excitement immediately followed by "Ok, what's wrong?"

Delving just a little bit deeper, I notice it's astronomical Debt to Equity ratio of over 300+ when its competitors are trading anywhere in the range of 28 to 80.  On the flip side, (GSK) also has a return on equity of about 180, while its competitors are in the range of 8 to 16.  Honestly, these numbers give me great pause but hey, it's Glaxo Smith Klein.  Everyone uses products from (GSK), so how concerning can the numbers really be?

The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

 

The Last Five Years

If we were to go back five years, this is what the 'Leverage Projection' would have looked like:

As you can see from the 'Security Data,' the 'DIV Pmt' of $.526  with a 'Multiplier Pick' of 80, allowed us to purchase 36.52% of our shares, indicated under 'Leverage Info.'  That's 36.52 shares of our 100 share lot.  It's important to point out that (GSK), as well as many European companies, modify their dividend payouts based on profits so their dividend payout could change considerably from quarter to quarter.  So as a word of caution, when setting up a 'Leverage Projection' based on a fluctuating dividend payout, it's probably wise to use the lowest dividend payout of the four previous quarters as the basis for your security projection.  Doing so will help prevent you from overleveraging your position and provide you with some pleasant upside results if the dividends are higher than what you allocated for.

And for our five year results:

GSK 031111 38.41 Yld 5.48 PE NA Ret Scen

A few things to note about this chart:

  • You can see that starting at the end of year four and after five years, (GSK) started a decline below our 'Expected Return' rate, but despite the decline, it still registered a modest return.
  • After looking at the end of five years, even though "Divi-X" managed to outperform 'Without,' one could wonder why they even bothered using "Divi-X" at all.  I would like to direct your attention to years one through three:
GSK 031111 38.41 Yld 5.48 PE NA Lev Summ

  • In Year 1, "Divi-X" outperformed by 8.89% (31.83% - 22.94%)
  • In Year 2, "Divi-X" outperformed by 11.45% (45.82% - 34.37%)*
  • In Year 3, "Divi-X" outperformed by 21.10% (78.72% - 57.62%)*
* results are cumulative

(GSK) is currently undergoing a multi-year restructuring process and now, after a steady two-year decline in its share price, some would argue that it is currently undervalued.  Personally, I would like to see the huge debt load addressed.  However, as of now, if someone were to believe that (GSK)'s restructuring efforts will yield some long-term positive results, an uptrend could definitely be in the cards.

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Dividend Yields

I'll quickly go over the dividend yields for (GSK) and then I'll lay out a new position.  Here is what our yield situation looks like after five years:

GSK 031111 38.41 Yld 5.48 PE NA 20YR

A few things to note about this chart:

  • Due to the inconsistency of (GSK)'s dividend amounts and lack of dividend growth, it pretty much renders the twenty year yield projections of  'The "Divi-X" System Workbook' seriously inaccurate, but it is still valuable nonetheless, for now, we can actually see what a poor dividend growth stock this security really is.
  • Despite the inconsistency of their dividend payout amounts, there is still a method to their madness:
GSK 031111 38.41 Yld 5.48 PE NA Details
  • The huge spike at the end of year five was an addition to the special annual dividend they payout every year, as indicated in the chart above.  This is not to be expected as a regular occurrence.  It was actually more of an enticement to retain shareholders during the remainder of their restructuring.
  • Going back to the 20YR Yield chart just above our last chart, you can see that regardless of the poor dividend growth, "Divi-X" still manages a full percentage point higher yield than 'Without,' 8.33% compared to 7.33%.

The Next Five Years

Here's what a new 'Leverage Projection' looks like for the next five years:

Based on the current dividend, our "Multiplier Pick" is an 80.  This has our new position levered at 36.91%, or 36.91 of our 100 shares.

Even though the last five years would have fell short of our 'Expected Return' rate, I would keep it the same, 9% in this case, because the 'Expected Return is what you "expect" to make, not what you "expect" the stock to do.  If you "expect" the stock to perform less than what you "expect" from the stock, you should probably find another stock.

You'll encounter many hills and valleys on your five year journey, but here is the five year linear milestones you would hope to achieve:

GSK 031616 39.66 Yld 5.54 PE 8.03 LevSumm

And our different 'Return Scenarios':

GSK 031616 39.66 Yld 5.54 PE 8.03 RetScen

Due to the inconsistent dividend history and dividend growth, I'm not going to bother posting a 20YR Yield chart.

Conclusion

If (GSK)'s restructuring efforts yield any fruit, the next five years will probably have a better outcome than the last five years but naturally, only time will tell.  That's it for now.  We'll look in on this one next year to see how we're doing.  As always, many happy returns.

Authored by Lee Carroll Wentker

All screen captures are taken from 'The "Divi-X" System Workbook'

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The security showcased here is for learning purposes only. It is not a recommendation or an endorsement of any kind. Do your own due diligence before making any investment.

All work is copyrighted by The Dividend Times, LLC 2015 - 2016

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