Those with long memories will remember when GlaxoSmithKline’s shares traded at £20. It was 2000, when the company was formed through a mega-merger. Hopes were high that a golden age of pharmaceutical discovery was about to dawn. A decade and a half later, with the share price stuck at about the £15 mark, there’s a plan to return to the old heights via a harder route.
It is not, however, the action-packed strategy that chief executive Sir Andrew Witty had indicated six months ago. Viiv, the 80%-owned HIV business, will no longer be spun off to join the ranks of FTSE 100 companies. GSK says the unit is performing splendidly and it would rather not be a seller; indeed, it may even be a buyer of the other 20% if the partners exercise their right to sell. As a result, GSK’s half-promised £4bn share buy-back has been cancelled, to be replaced by a £1bn special dividend.
Often such news would produce groans of disappointment among fund managers who expect their jam today, not tomorrow. But Witty has made the right call: if Viiv’s current form (sales up 42% in the quarter) is a medium-term guide, there is no reason to get out.
The question was whether GSK could simultaneously hold its dividend. Witty reckons that, too, can be done. He’s made a three-year commitment to keep paying 80p a share. He’s also stuck his neck out on earnings. This year’s whack, partly a result of the asset shuffle with Novartis, will be double-digit painful but then the clouds clear – earnings per share will grow at compound rate of “mid to high single digits” all the way to 2020 even if asthma treatment Advair, GSK’s biggest product, is hit by generic competition.
The confidence on earnings should be reassuring, even if it bears little resemblance to the 2000 vision for GSK. That vision became redundant at least a decade ago, when governments got tougher on pricing and generic manufacturers became smarter.
Witty’s plan B for GSK for the past seven years has been a de-risking exercise. Thus there was the sale of the oncology unit to Novartis last year, the purchase of the Swiss firm’s vaccine business and the pooling of resources in consumer products such as toothpastes and nicotine gum. The result is a duller but safer company with a 5.3% dividend yield. The tale still lacks the vital ingredient of growth, but GSK is on the right track.
Life looks a grind for Sainsbury’s shareholders
A first statutory loss for a decade, a 15% fall in underlying pre-tax profits to £681m and a cut of almost a quarter in the dividend is nobody’s definition of success. Relative to shrunken expectations, however, last year counts as a decent result for Sainsbury’s. The business did not suffer a catastrophe in the style of Morrisons or Tesco.
That’s the good (ish) news. The worry for shareholders is that life looks a grind as far as the eye can see. Chief executive Mike Coupe is trying to fine-tune his “investment” in lower prices, which is an investment investors would prefer he didn’t have to make. Sales densities declined from £18.93 to £18.24 per sq ft per week last year. Online orders, obliging the supermarket to do the hard work of packing and delivering the goods, continues to grow in popularity. And, one of these days, the assumed recovery at Tesco may bite.
If Sainsbury’s can continue to conjure a 3% profit margin from that unpromising mix, shareholders would probably accept their lot. The new mechanical formula for dividends – half of earnings are paid out – produced 13.2p last year, a yield of 5% at the current share price. Not bad if it could be relied upon.
Unfortunately it can’t. Any of the various headaches could intensify. On a sales base of £26bn, the difference between a 3% margin and, say, 2% is huge. “We will remain competitive on price in the market,” says Sainsbury’s, an acknowledgement that some factors are simply beyond its control.
A case of good management and a tough market that may get tougher yet.
Beware Greenspan’s ‘irrational exuberance’
Janet Yellen, chair of the US Federal Reserve, says share prices are “quite high”. It’s a view held widely. Pin chief executives against a wall and many confess they fear what will happen to stock markets when interest rates rise.
Do not, however, attempt to guess the moment of the turn. Instead, recall that Alan Greenspan, Yellen’s predecessor but one, made his famous speech about “irrational exuberance” in financial markets in December 1996.
Within the next 18 months, there was an Asian currency crisis, a Russian debt default and a giant hedge fund blow-up. But Greenspan kept the cheap money flowing. It wasn’t until 1999-2000 that the stock market bubble finally burst.
