Thanks to Junes surprising referendum result, fears over how our exit from the EU will proceedand the recent plungein sterling, shares in the some of the UKs biggest businesseshave been on something of a roll. Quite rightly, investors have looked to protect their hard-earned wealth by stuffingtheir portfolios withcompanies that earn a significant proportion of revenue from overseas. Brentford-based pharmaceuticals giant, GlaxoSmithKline (LSE:
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At the start of October, shares in the FTSE 100 stalwart went as high as 1,722p. To put things in perspective, the last time this happenedwas in 2013. Before that? Youll need to go all the way back to early 2002.After such a decent run of form however, Im starting toquestion whether shareholders should consider moving on.
Its nothing to do with todays trading update. Indeed, the figures released by the company this afternoonshould make pleasant reading for shareholders. Total saleswere up8% to 7.5bn, thanks in no small part to the performance ofnewpharmaceutical and vaccine products (up 79% to 1.21bn).Core earnings per share, both for the quarter and for the year to date,areup 12%.As a result,this kind ofpercentage growth continues tobe expectedfor the whole year.
Time to sell?
Its easy to understand why Glaxo is held in high esteem. Todays update combinedwith the defensive, geographically diversified nature of the business, thesizeable 4.9% yield and its reasonablevaluation (a forecast price-to-earnings, or P/E, ratio of justbelow 16, according to Stockopedia) make the shares attractive. Dig a little deeper however, and Im not convinced everything is so rosy, at least in the nearterm.
Although earnings are forecast to improve significantly next year, this will still leave dividend cover rather low at 1.23. Prospective income investors, may justifiably question whether there are saferopportunities elsewhere, especially as payoutshavent budged since 2014. For this strategyto be effective, they really need to be growing consistently. A stagnant dividendsuggests that a business is treading water. All it may take is one significant negative eventtothrow Glaxos strong recoveryoff-course.This could come in the form of next monthsUS election.
Assuming the opinion polls are correct (which isnt always the case these days), Hilary Clinton will shortly be confirmed as the next president. Given her comments on excessive drug pricing, I wouldnt be surprised to see shares in pharmaceutical companies such as Glaxo coming under pressure should she get the keys to the White House.
But there could be other, more traditional headwinds. While it looks to be making progress in addressing the patent cliff (the recent US approval of new shingles vaccineShingrixis undeniably positive), developing new drugs remains challenging and time-consuming. Its also clear the new CEO Emma Walmsley will need to hit the ground running when she takes over next March. The markets relatively muted reaction to her appointment (and to todays trading update) suggeststhe share price may have reached its zenith for now.
In sum, while I certainly dont think shares in Glaxo will crash in the near future, Im less bullish than most about the companys prospects over the next year or so.Sometimes, it pays to leave the party when youre having the most fun.
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Paul Summers has no position in any shares mentioned. 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.
