Glaxo shares cheer pay out news ignore so so results

Bonus for investors grabs the headlines

GlaxoSmithKline shares leapt to the top of the FTSE 100 leaders’ list this afternoon after it said it would return an additional £4bn to shareholders this year.

The sum represents the entire net proceeds of its three-way deal with its Swiss counterpart Novartis announced last year, which GSK said was on track for targeted completion in the first half of 2015.

Investors responded well to the news that was released together with Glaxo’s fourth-quarter results.

The shares extended moderate gains of the morning to a rise of 3.5%.

The additional pay-out can be expected to be divided amongst the 5 billion GSK shares outstanding, equating to 80p per share.

On top of ordinary annual dividends, which Glaxo said on Wednesday would be maintained at last year’s 80p-per-share level, the annual pay-out for the year would result in a total shareholder payment of 160p in the current year.

Assuming these details are realised in practice, Glaxo’s effective dividend yield for the year would rocket almost 80% from last year and result in an 11% pay-out, by far the best of any stock on London’s benchmark FTSE 100 index.

That’s excellent to have, albeit in all probability, such a yield is unsustainable, of course.

‘Big Pharma’ papering over the cracks

None of the day’s news will negate the major long-term concerns about ‘Big Pharma’ firms, like Glaxo, which pushed it to enter into the complex agreement with Novartis in the first place.

Namely, established drug makers around the world have reached a period in their drug development cycles at which many big-earning medicines and other products will soon lose patented status allowing manufacturers of generic versions to introduce cheaper copy-cats.

This would weigh on plumped-up margins of companies like Glaxo.

Portfolio shuffle helps, but investors remain concerned

In GSK’s case, it’s trying to combat this trend by buying vaccines, selling cancer drugs and forming a consumer health joint venture with Novartis in a $20-billion transaction designed to ensure more stable and predictable long-term growth. The deal is due to close in the first half of 2015.

The innovative deal is designed to help the two groups clean up their asset portfolios.

The agreement involves Glaxo offloading its cancer treatment division to gain Novartis’ vaccine units and also enter into a joint venture to create the world’s biggest consumer healthcare business.

Investors, however, are worried about short-term pressure on the 15-year-old inhaled medicine Advair due to competition from rival products and falling prices, as well as the slow uptake of GSK’s new respiratory drugs Breo and Anoro.

Q4 results were actually quite ordinary

Looking away from the headline-grabbing pay-out news and back at its quarterly report, we can see that in fact, Glaxo posted good, if not stellar fourth-quarter performance.

• Quarterly sales were £6.19bn pounds down 8% from a year earlier.
• Core earnings per share were down 6% at 27.3 pence.
• This was still better than analysts were expecting on average.
• Consensus had foreseen sales of £6.2bn and core EPS, which excludes certain items, of 25.9 pence, according to Thomson Reuters data.
• Cost cuts lay behind much of the better-than-forecast numbers.

Beats low expectations, announces HIV unit IPO

The overall impression is that instead of performing strongly on an absolute basis, Glaxo merely beat low market expectations.

This impression isn’t changed much by what could be interpreted as the firm’s further tinkering with its corporate structure amid reports that emerged earlier on Wednesday suggesting it would float a minority stake in its ViiV Healthcare unit.

ViiV specialises in drugs to combat HIV.

Glaxo said it hired investment banks Citi, Goldman Sachs and Morgan Stanley to advise on the float.

Plans for an IPO were first announced in October, but the announcement of advising banks may suggest the plan is running ahead of its earlier assumed schedule because the deal had been expected to come to market next year.

Either way, an IPO of the unit could help underpin GSK’s dividend.

A market value of between £12bn and £18bn is expected for ViiV likely putting it among the biggest pharma industry IPOs of this year or next.

Glaxo’s CEO Andrew Witty told reporters earlier this month the IPO could serve as a model for future corporate moves by his firm.

Glaxo shares still sneaking downwards

The market’s current stance on the stock is quite well reflected in its daily chart.

GSK is flirting with the loss of a major moving average line, the 200-day.

Additionally, buying momentum is waning (MACD and percentage oscillator—in blue) though the balance of trading has today ticked off the dividing line between net selling and net longs.

A fairly clear, albeit erratic descending trend channel formed in the summer of 2013 and the stock hasn’t left it to any great extent since.

Traders of the Daily Funded Trade in this title offered by City Index tracked the underlying stock’s slippage later in Wednesday’s session to more modest gains of 1.3% by mid-afternoon.

Strong technical support for the DFT seems likely around 1450, the levels at which support was last observed in recent days—especially given that the level is close to the last ‘buy’ signal generated by our attached MACD Fast Line/Zero Cross System.

The MACD/Zero Cross system uses moving average convergence/divergence concepts to create long entry/short exit signals (and vice versa).