On Tuesday, GlaxoSmithKline (LSE: GSK) announced with much fanfare that it had selected Emma Walmsley to become the groups new chief executive officer when its current boss Sir Andrew Witty steps down next year.
While we wont find out how adept Walmsley is at managing the group as a whole for several years, on paper, she looks to be an excellent candidate. Shes an internal hire who currently runs Glaxos consumer healthcare division, so Walmsley knows at least part of the group well.
During her nine years
running the consumer division, Glaxos CEO-elect has presided over strong sales growth and diversification to higher volume, low margin consumer staples like toothpaste. According to Euromonitor International, Glaxos Sensodyne toothpaste was the fastest-growing global toothpaste brand between 2008 and 2013. And last year Walmsley presided over Glaxos asset swap with Novartis where the firmtraded its cancer drugs business for the Swiss companys vaccines and consumer health assets. Consumer healthcare now makes up a third of Glaxos overall revenue base.
With this record behind her, it would appear that the powers that be at Glaxo have selected Walmsley for her skill in managing and growing a global consumer business. However, her appointment may also put an end to speculation (and demands from large investors) that Glaxo couldbreak itself apart to unlock value.
Breakup off the table
Is this bad news for shareholders? Possibly. Breaking a complex business like Glaxo up would undoubtedly create value for investors. Each one of the groups component businesses would attract a separate valuation, reflecting its outlook and position in the market. When grouped together in a conglomerate like Glaxo, the value of the component businesses could be low-balled by the market. Indeed, recently the market has been more concerned about Glaxos falling sales of its Advair asthma treatment, which are completely unrelated to the consumer division, than anything else.
On the other hand, Glaxos management argues that the group is stronger as one unit as the separate divisions complement each other. Certainly, this viewpoint has helped the group over the past few years. Income from the consumer healthcare division has helped prop-up overall group revenue as sales slid following patent expirations.
The right choice
Keeping Glaxo whole, rather than breaking the firm up could be the right approach if management can unlock value via other methods. And if sales growth returns across all divisions its more than likely management will stop receiving calls to break the group apart.
City analysts are predicting steady revenue and earnings growth over the next few years. This year the company is expected to report revenue growth around 10% and City analysts have pencilled-in earnings per share growth of 27%. Next year forecasts suggest the companys earnings will grow a further 7%.
Overall, it looks as if Walmsleys appointment is good news for Glaxos shareholders. Shes a company insider with a record of growing sales exactly what Glaxo needs.
Looking for dividends?
If you’re looking for dividend champions to jump-start your portfolio’s income, I strongly recommend you check outthis special report, which gives a rundown of what I believe is one of the hottest dividend stocks in London today.
The exclusive report entitled A Top Income Share looks at a hidden FTSE giant that’s already an income champion but is also investing for growth and these ambitious expansion plans should power dividends through the roof in the years ahead.
To discover more justclick here and enjoy this exclusive wealth report.It’s 100% free and comes with no obligation.
Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
