LONDON — It’s been a long tough slog for GlaxoSmithKline plc (LON:GSK) shares, but things are looking up. While many FTSE 100 shares doubled as they recovered following the U.S. financial crisis, GlaxoSmithKline plc (LON:GSK) shares struggled to break through the 1,500 pence level to claim a 50% gain.
That’s changed in the last month as Glaxo posted good earnings and received approval for a new drug treatment. This has caused the shares to cross 1,700 pence, and there might be more to come. There are still risks, of course, and even if the company continues to do well then the market can still be volatile. But I’m looking past the risks today to three reasons to continue to like Glaxo’s shares in the coming years.
Returning cash to shareholders
Let’s be honest. Most investors are initially drawn to GlaxoSmithKline plc (LON:GSK) for its above-average dividend yield. With the 10-year gilt offering less than 2%, it’s easy to understand why investors are drawn to Glaxo’s 4.2% dividend yield.
That dividend has been funded by Glaxo’s robust cash flows. With the steady sales of its over-the-counter health care products and a more diverse portfolio of pharmaceutical drugs, it looks like Glaxo’s cash flows should be there to continue funding its big dividend payout.
Over the last two years, investors have also benefited from Glaxo repurchasing more than 2 billion pounds worth of its own shares in each year. That is set to continue in 2013 as GlaxoSmithKline plc (LON:GSK) plans to repurchase another 1 billion to 2 billion pounds of its own shares. The benefit to shareholders here is indirect, but reducing the share count investors are seeing their ownership in the company grow. With consumer beverages Ribena and Lucozade up for sale, there is a good chance the share repurchases will continue, too.
Cash flow is the key to the current dividend, but it’s Glaxo’s pipeline of new drugs that is the key to maintaining the dividend and growing it in the future. Fortunately, Glaxo has a strong pipeline of new potential products that should help the company maintain its cash flow as respiratory treatment Seretide — also known as Advair — eventually sees competition from generic competitors.
Manufacturing difficulties have kept Seretide competitors away although the drug lost its patent protection in 2010. Management continues to believe that generic competition for Seretide won’t arrive in the U.S. until 2016 at the earliest, and perhaps even later than that. This should give GlaxoSmithKline plc (LON:GSK) the time to build out sales of Breo Ellipta, its new respiratory treatment that received approval in the U.S. earlier this month and is expected to receive approval in Europe later this year.
Breo Ellipta has the potential to be a blockbuster drug for Glaxo, but it’s the depth of Glaxo’s pipeline that impresses as Breo may be just the first of many drugs to see approval in the next few years. GlaxoSmithKline plc (LON:GSK) has also applied for approval for fellow respiratory treatment Anoro Ellipta and five other drugs — and has more than a half dozen more in phase 3 trials.