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Dividend stocks are abundant within the highly profitable health care and pharmaceutical sectors.
But the biggest dividend among Big Pharma stocks belongs to GlaxoSmithKline PLC (NYSE: GSK). The Brentford, England-based company’s 5% dividend yield stands well above other health care giants such as Johnson & Johnson (NYSE: JNJ) and Bristol-Myers Squibb (NYSE: BMY), which yield 3% and 2.2%, respectively.
GSK holds a diversified business spread across three core categories: pharmaceuticals (59% of total revenues), consumer health care (25%) and vaccines (16%). It also has a diversified product portfolio. According to its most recent earnings report, the company now has 10 products that each generates at least 500 million pounds (approximately $783 million) per year.
GSK’s high dividend yield may not entice investors because the company’s fundamentals have deteriorated in recent quarters. Earnings per share fell 16% last quarter year-over-year. This was due primarily to pricing weakness in the pharmaceuticals segment – most specifically attributable to generic competition to GSK’s flagship asthma and COPD drug Advair.
But there are plenty of reasons to be optimistic about the company’s future. Total revenue actually grew 1% last quarter. This was because GSK performed quite strongly in essentially each segment except pharmaceuticals, where Advair declines caused group sales to fall 7%. Even within the pharmaceuticals group, the company saw 42% growth in HIV sales.
In the consumer health care segment, revenue grew 24% year-over-year, thanks largely to the launch of the over-the-counter nasal medication Flonase. Lastly, revenue in the vaccines segment grew 10%.
GlaxoSmithKline has a stocked pipeline of new drugs to keep growth intact going forward. This is the result of aggressive research and development investments over the past several years. For example, GSK now holds 40 products in phase 2 or phase 3 development. The company will provide greater details on these products at its investor meeting in November.
As far as the Advair concerns, while the current declines are weighing on earnings now, GSK has a plan to slowly reduce its reliance on this particular product by broadening its pharmaceutical portfolio. By 2020, GSK expects to reap more than 90% of its pharmaceutical sales from nine products, compared to four currently. In addition, management expects continued steep declines in Advair sales this year, but they expect that the company will return to growth in total respiratory sales in 2016.
In the vaccines segment, GSK’s progress in HIV treatments is by far its most interesting development. ViiV Healthcare, which is majority-owned by GSK, is a stand-alone global HIV business whose recent launches of the HIV drugs Tivicay and Triumeq have continued to surpass internal expectations.
Finally, GlaxoSmithKline’s consumer health segment is now the largest supplier of over-the-counter medicines in the world. GSK holds a number of popular brands, including Sensodyne, Theraflu and Poligrip.
The key takeaway for investors is that while GSK has had a rough ride over the past year, there are likely better days on the horizon. It has a balanced business and is making significant progress in diversifying away from Advair. Going forward, its robust pipeline and strong brands should allow the company to return to earnings growth.
In the meantime, investors can continue to count on GlaxoSmithKline’s hefty dividend payouts.
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