Welcome to the Income Investor blog. With this blog I want to show you how I invest for income and inspire you to do the same. I started investing in the stock market when I was in university and believe investing in the stock market is a great way to grow wealth, especially when investments are all held within an ISA and I’d encourage all investors to make full use of their ISA allowance, or as much of it as is feasible.
Investing in shares that provide higher dividends is a sound investment strategy, of course it can be mixed with a focus on smaller and higher growth companies as well, but I believe underpinning a portfolio with a careful selection of higher yielding shares is sensible and one of the best ways to ensure you make strong returns from your investments whilst reducing risk. I have certainly found this to be the case. Companies such as housebuilder Persimmon and investment management company Legal & general have been strong performers to date, helping me grow my money tax-efficiently in an ISA.
In the past I’ve probably traded too much which has cost me a lot of money. One of the upsides of income investing is that the shares should be steady, allowing you to reduce the number of times you buy and sell, this helps reduce costs and boost returns. I plan now not to sell any of my “income” shares unless the reason for buying the share in the first place disappears or the business starts to face unexpected threats that significantly change its prospects.
Please check out the rest of my blog and please keep checking in for more updates. Happy investing!
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24/03/2018 – GSK GlaxoSmithKline
Shares in FTSE 100 pharmaceuticals giant GlaxoSmithKline (GSK) jumped last week after it pulled out of the running to acquire rival Pfizer’s consumer health-care business. The move came not long after consumer goods giant Reckitt Benckiser also pulled out of acquiring the huge portfolio which includes the painkillers Advil.
Shares in GSK rose on the day of the announcement by over 3%, despite the market falling overall; showing investors thought management had made the right decision in not pursuing the acquisition.
“While we will continue to review opportunities that may accelerate our strategy, they must meet our criteria for returns and not compromise our priorities for capital allocation,” said the FTSE 250 company’s chief executive Emma Walmsley.
GSK also announced separately on the same day that it has received approval for its Shingrix treatment for shingles in Europe and Japan. Shingrix was approved in the US and Canada in October last year.
In other recent news, GSK has also been buoyed this month by the announcement that rival generic drug-maker Hikma Pharmaceuticals won’t be launching a rival to GSKs blockbuster drug Advair until 2020. GSK had previously said that if no generic competitor is launched in 2018 adjusted earnings per share were likely to grow 4-7% at constant exchange rate, rather than potentially falling to a range between “flat and down 3%” if a generic competitor in launched mid-year.
The latest results from GSK were also reassuring for investors, the company for the time being looked to put worries about its future dividend aside as it reported 3% growth in sales and 4% in earnings per share at constant currency rates.
The full year results also showed turnover of £30.2 billion in 2017 were up 8% at actual exchange rates, with growth coming across its three business divisions. Pharmaceuticals was up 7% £17.3 billion at AER, vaccines up 12% to £5.2 billion and consumer healthcare up 8% to £7.8 billion
Alongside the positive results, the new CEO was providing investors with reassurance about the future. Emma Walmsley said: “Looking ahead, in 2018 we could see a potential generic version of Advair in the US and our 2018 guidance reflects this…With the sales momentum we anticipate from new and recent launches and focused improvements in operating performance we are increasingly confident in our ability to deliver mid to high single digit growth in adjusted EPS CAGR.”
In other comments alongside the results, Walmsley highlighted GSK’s focus three new drug launches: triple-drug inhaler Trelegy Ellipta to treat COPD; Juluca, the first two-drug, once-daily, pill for HIV; and Shingrix, a new vaccine to prevent shingles.
“Improving our Pharmaceuticals business remains our main priority and we are strengthening our pipeline with a focus on priority assets in two current therapy areas, Respiratory and HIV, and two potential areas, Oncology and Immuno-inflammation,” she said.
Opportunities and threats
GSK’s most obvious opportunity comes from its more concentrated pipeline of new drugs, if they make it through the testing process they could become the next blockbusters, protected by patents. They’d come onto the market just at a time as the company continues to overcome fears of a patent-cliff where big drugs such Advair mentioned earlier face more competition from generic rivals.
GSK under Walmsley is concentrating its pharma business into key areas which increases risk and reliance on the trials of the drugs in the pipeline but also makes the business more focused and manageable. More than 30 drug development programmes were stopped not long after she became CEO as part of this new direction.
Not long after getting the top job she said the company must focus on supporting its two current lead therapy areas, respiratory and HIV/infectious diseases, while also investing heavily in two major markets, oncology and immuno-inflammation. GSK will spend 80% of is pharma R&D capital on these four fields, with disinvestment from other non-core therapy areas.
In its full year results, GSK stated that it achieved new product sales of £6.7 billion, +51% AER, +44% CER, driven by strong performances from Tivicay and Triumeq in HIV, the inhaled Ellipta portfolio and Nucala in Respiratory and meningitis vaccines.
One threat that persists is the desire some investors have for the company to be broken up. Walmsley has denied this will happen and one of the most vocal backers, Neil Woodford, now has many other problems on his hands to contend with. The CEO is likely to want to keep the business together and focus on longer term growth, so this threat is minor for the time being. Expect it to reoccur though if the financial performance of GSK deteriorates.
Another, bigger threat, comes from generic drugs. GSK investors have worried about this for many years now. The company seems to have good pipeline of drug development and testing, R&D spending is up strongly and focusing on key areas. This means the company is not overstretched. It should help improve the balance sheet as well. The generic drug threat does not look to be increasing in the near term so it shouldn’t be a major threat to the share price or to GSK’s growth.
GSK in its results stuck with its growth forecasts to 2020; it expects to see mid-to-single digit growth. GSK’s forecast factors in the launch of at least one generic version of Seretide/Advair, which is still its biggest seller, earning £848 million in the second quarter, a 14% decline on the same period last year.
Strengths and weaknesses
One of the major strengths and attractions for investors looking at GSK is the diversity of its revenue. It as multiple strong revenue streams as shown in the latest full years results. Although pharma is still the biggest business unit by a large distance, vaccines and consumer healthcare are also large and growing well. This makes GSK more diversified and less risky than a rival such as AstraZeneca which is more of a pure pharma play.
Although many businesses have sought to simplify in recent years, diversity needn’t be seen as a negative thing. Well managed businesses that have multiple income streams can be very rewarding for shareholders. The company has remained disciplined in not chasing growth through large acquisitions such as acquiring Pfizer’s consumer health-care business. Also, by maintaining the dividend and promising future growth the CEO has reassured investors.
The historical weakness for the business, especially under its previous leadership, was bringing new blockbuster drugs onto the market. It seems now though the company may be on the cusp of addressing this. If the blockbuster drugs can come onto the market in the near to medium term the shares should rise rapidly. Fundamentally, the business relies on new drug finds to grow in the future.
The reliance on a smaller pipeline of drugs does however (as mentioned earlier) make GSK more dependent on the successful testing of fewer drugs. Investors will have to wait and see what the outcome is of this more concentrated pipeline.
The share price and fundamentals
GSK’s share price has moved very little during 2018 to date and over a six month period the shares are down around 10%. Over a five year period the share price is down a little over 13%. GSK is clearly hardly a compelling growth story, although as a FTSE income share this is not to be expected. Instead, investors want to see steady organic growth and a return to dividend growth.
With a dividend yield now over 6% GSK remains attractive to investors looking for income. I hold the shares for this reason, alongside a number of other higher yielding shares. The risk is that if profit falls due to a loss of patent protection for current drugs and new drugs aren’t developed, then the dividend would have to be axed. This would then lead to a share price fall. Other companies such a Tesco and more recently Inmarsat (the latter of which I still hold) have had to cut their dividends in recent years.
If GSK though can return to dividend growth this should boost the share price, it would reflect a growing confidence in the future of the business.
With turnover, operating profit and free cash flow all up strongly in the 2017 full year results I think GSK could reward shareholders in the long term. All this will be underpinned through by the success in clinical trials of GSK’s reduced drug pipeline. Not taking on debt or tapping shareholders for cash to fund a major consumer-focused acquisition seems sensible and in line with the management’s stated strategy. I do think GSK should have announced sooner that it would not be buying Pfizer’s consumer health-care business if only to reassure investors.
GSK under its fairly new CEO seems to be a more focused business, with a sensible strategy which should over the near to medium term should see it reward shareholders who’ve had to be patient in recent years as the share price has fallen. Better times may be coming, and I’ll continue to hold the shares in my portfolio, especially given the high dividend yield which I think is sustainable – at least for a while longer. In fact, I am confident it will grow as new drugs pick up sales over the coming years and the vaccines and consumer health divisions also grow.