Afternearly a year of givingGlaxoSmithKline (LSE: GSK) a wide berth, the market finally seems to be waking up to the companys potential. Indeed, so far this year Glaxos shares have outperformed the broader FTSE 100 by 8% as investors are beginning to buy into the companys turnaround story and wake up to the value locked away within Glaxos corporate structure.
The number of investors calling for a break-up of the pharma giant has also increased. The UKs best-known fund manager, Neil Woodford has been calling for a break-up of Glaxo for some time, buthes been joined by the London arm of Och-Ziff Capital Management, the activist hedge fund headquartered in New York, which has built a stake of 0.5% in the company.
A break-up could unlock value for Glaxos shareholders but even if the companys management refuses to go down this route, itsearnings are set to return to growth this yearafter a year of stagnation and this should re-ignite interest in the companys shares.
Backto growth
Glaxos management expects the companysrevenue to riseat a compound annual growth rate of low-to-mid single digits over the five years from 2016 to 2020.
Over the same period, core earnings per share are expected to expand at a rate in the mid-to-high single digits. Admittedly,a large part of Glaxos earnings growth will come from cost savings. The group is on track to achieve annualised cost savings of 3bn by the end of 2017, but these savings should help streamline the groups business.
Still, City analysts expect Glaxo to report earnings per share growth of 11% for 2016, recovering some of the ground lost last year. Based on these forecasts from the City, Glaxo is trading at a forward P/E of 15.8. Most of the companys peers trade at a P/E in the low-20s. As Glaxo returns to growth, the market should re-rate the company and Glaxos shares should attract a higher valuation.
A great income stock
So, over the next year as Glaxo racks up its first growth infive years, investors should begin to view the company in a more positive light once again. Whats more, Glaxo is on track to issue a special dividend of around 20p per share during the first quarter of this year.
The special dividend is connected to Glaxos asset swap with peer Novartis. As part of the transaction, Glaxo announced that it would be returning 1bn to shareholders in the form of a special dividend along with the companys regular fourth quarter payout thats scheduled for Thursday 14 April 2016. The shares will go ex-dividend on Thursday 18 February 2016. Together, the regular and special payout will amount to approximately 40p per share, putting Glaxo on track to return 100p per share to investors this year and giving a yield of 7%.
Next stop 1,600p?
Overall, Glaxo’s return to growth coupled with the company’s market-leading dividend yield indicates that the group’s shares could be on track to return to 1,600p this year.
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Rupert Hargreaves owns shares of GlaxoSmithKline. The Motley Fool UK 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.
