Looking back on the recent disasters at Thomas Cook and Sirius Minerals, I wrote of my developing cautious strategy regarding recovery situations. I wont now buy into a recovery prospect until Ive seen the recovery genuinely underway. And I wont consider touching a company thats seeking bailout funding until the paperwork has all been signed and the cash is safely in the bank.
Im a big follower of Warren Buffetts urging to seek shares in great companies at fair prices, not the lowest possible prices. It makes more sense the older I get and my focus turns to reducing my risks as I invest to supplement my State Pension.
But that doesnt mean theres no room for recovery investing, because we do sometimes see truly great companies at unusually low prices in that situation. One example is the oil price crash, when 2016 saw BP and Royal Dutch Shell share prices taking a tumble. Both were clearly great companies, and both quickly set themselves up for sustainable recovery through offloading non-core assets. Since the depths of the crisis, BP is up 52%, and Shell 77%.
Longer recovery
That was a quick recovery, but theres been another recovery, much longer in the making, in the shape of GlaxoSmithKline (LSE: GSK). Glaxo, like fellow pharmaceuticals giant AstraZeneca, suffered when a number of its key drug patents expired and its sales were hit by competition from generic suppliers good news for people wanting cheaper drugs, but not so great for shareholders profits.
While that might not have been avoidable, the subsequent profit crunch surely was. After all, Glaxo knew exactly when its patents were going to expire, and it had plenty of time to invest heavily in its development pipeline and get replacement candidates coming through the process.
That did ultimately happen. But, in my view, it was a good bit later than it should have been, and it highlights one of the most common failings I see in UK companies today. When something serious needs to be done, they leave it until the last minute when the bottom line is hurting badly and theres no other option. I wonder, are they afraid to highlight clearly foreseeable upcoming problems for fear of scaring shareholders and seeing share prices fall?
Coming good
The good news is that Glaxo did indeed refocus on its long-term recovery, and the fruits are now showing. From an earnings dip in 2017, EPS growth is back on the cards, even if its still a little erratic at the moment drugs take a long time to work through the onerous approvals process and reach production, and it could be a few more years before earnings settle down into what I think will be a new sustained growth phase.
Glaxos dividend has been growing too, and a 10% hike for the year to March provided a yield of 3.1%. Thats only a modest dividend compared to the FTSE 100s current overall forecast yield of 4.5%. But it was covered 3.7 times by earnings and what I see is a company earning plenty to reinvest in its R&D pipeline while creating potential for significant dividend growth.
So do I see GlaxoSmithKline as a recovery candidate thats recovered enough to make my Pension shortlist? Easily, yes.
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