After a fall of 12% to 1,423p since the start of 2014, the chances of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US) shares beating the FTSE 100 by year-end are looking pretty slim, even though the index itself has fallen 1%.
So whats going wrong?
The price slipped in July, when the companys interim report told us to expect full-year core earnings per share only in line with 2013s, and a couple of brokers have subsequently downgraded their target price for the shares.
The investigation into bribery allegations in China has taken its toll too, and many will be pleased that the company got away with a relatively light punishment. Announced on 19 September, the Chinese court found that Glaxos Chinese subsidiary had illegally offered money or property to non-government personnel in order to obtain improper commercial gains, and been found guilty of bribing non-government personnel, and was handed a fine of 297m.
That was more lenient than many had feared, and the share price actually perked up a little on the day of the announcement. In fact, it was a good deal less than the $3bn the company had to pay in 2012 after confessing to having illegally marketed drugs in the USA.
Selling pharmaceuticals is a business that clearly has its dirty side, and with allegations of dodgy practices in a handful of other countries too, fears of further penalties are surely helping keep the share price down.
But is there an upside?
With the share price down, were looking at a forward P/E of 15. Thats a fraction above the long-term FTSE average, but Glaxo has been paying dividends significantly above average. Last year shareholders enjoyed a 4.8% yield, and theres 5.6% forecast for this year.
The problem, though, is that it will not be well covered. Although Glaxo expects core EPS to be flat, analysts are forecasting a 19% fall in the overall figure, and that would leave the dividend covered only 1.18 times. Cover based on 2015 forecasts would recover a little, to 1.19 times, and Glaxo can meet its dividends from its own resources over a couple of flat years but longer term, we need to see stronger earnings.
The company is in a transition phase at the moment after patent expiry has hit sales of a number of key drugs, but there are some promising new candidates coming along including new launches of diabetes and cancer drugs.
At interim time, chief executive Sir Andrew Witty did say that we remain confident in GSKs medium and long-term growth prospects and in our strategy to generate sustainable sales growth.
Overall, then, I dont think there are any long-term worries but well need to see if any further dodgy-dealing investigations emerge.
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Alan Oscroft has no position in any shares mentioned. 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.