GSK provides reassuring prognosis for annual dividend

GlaxoSmithKline looked to put worries about its future dividend to bed as it reported 3% growth in sales and 4% in earnings per share at constant currency rates.

Turnover of £30.2bn in 2017 were up 8% at actual exchange rates, with growth coming across its three business divisions. Pharmaceuticals was up 7% £17.3bn at AER, vaccines up 12% to £5.2bn and consumer healthcare up 8% to £7.8.

Total earnings per share increased 67% to 31.4p even after accounting charges of £1.6bn from recent US tax reforms, while adjusted EPS of 111.8p was up 11% AER, in line with management's guidance.

With the business throwing off free cash flow of £3.4bn in the year, a fourth-quarter dividend of 23p made for 80p for the year.

Investors and analysts feared future dividend payments might be in the firing line as the pharmaceuticals giant looks to fund further growth, especially as new CEO Emma Walmsley, who was promoted to the top job in April after running the consumer division , might be tempted by acquisition opportunities as US rivals Pfizer and Merck look to exit this area. She put this to bed, for 2018 at least, and said the board continued to expect 80p dividend for 2018.

Sales in 2017 benefitted from rivals struggling to launch a generic version of GSK's Advair respiratory blockbuster after tripping over a few US regulatory hurdles.

For 2018, as last year, two options for EPS guidance were given, bearing in mind the uncertainty over the timing and impact of this possible generic competition in the US. In the event of no generic competitor, Walmsley guided to adjusted EPS growth of 4-7% at CER, which would potentially fall to a range between "flat and down 3%" if a generic competitor in launched mid-year. Such a launch would be expected to see full year 2018 US Advair sales of around £750m, down from £1.6bn last year. Both scenarios reflect the benefit of US tax reform with expected 2018 effective tax rate on adjusted profits of 19-20%.

"Looking ahead, in 2018 we could see a potential generic version of Advair in the US and our 2018 guidance reflects this," Walmsley said.

In other comments alongside results, Walmsley highlighted GSK's focus three new drug launches: the triple-drug inhaler Trelegy Ellipta to treat COPD; Juluca, the first two-drug, once-daily, pill for HIV; and Shingrix, a new vaccine to prevent shingles.

"Improving our Pharmaceuticals business remains our main priority and we are strengthening our pipeline with a focus on priority assets in two current therapy areas, Respiratory and HIV, and two potential areas, Oncology and Immuno-inflammation," she said.

Looking further forward, she said the board was "increasingly confident" about the company's ability to deliver "mid to high single digit growth in adjusted EPS" at compound annual growth rates, thanks to the sales momentum anticipated from new and recent launches and focused improvements in operating performance.

With comment like this and the results beating the City's average forecasts at the top-line for the fourth quarter for sales and at the bottom line albeit from tax and financials, the shares rose more than 3% on Wednesday afternoon to 1,288.2p.

But as Advair accounts for 10% of group sales, Nicholas Hyett, an analyst at Hargreaves Lansdown, said the looming generic competition was a "ticking timebomb under the group...if a generic makes it to market early next year, it will blow a hole in the GSK income statement".

Elsewhere, however, he acknowledged that numbers were broadly heading in the right direction, with cash flow and margins both improving in line with Walmsley’s strategy.

"The commitment to hold the dividend flat next year will have caught the eyes of some investors – following speculation that it could be sacrificed to fund a big consumer healthcare acquisition. There’s no comment on those rumoured transactions in results, but that might not be enough to chase the speculation away," Hyett said.

Analysts at Liberum said it was a strong set of numbers from respiratory in particular and the guidance for 2018 was "encouraging" at about 1% ahead of consensus expectations.

"This should settle nerves on the company's expectations for HIV in a year when new competition is expected. We are also encouraged by the company being 'increasingly confident' in the longer term guidance to 2020 which consensus sits below."

On the 2018 guidance, they added: "We believe £750m US Advair sales at CER in the guidance equates to more like a 50% decline which would be a hit to EPS of around 1.5%. Thus adjusting for the different Advair scenarios, we see the guidance as being equivalent to +1.5% to -1.5%, about 3% better than consensus. However, the company has also guided to a tax rate that implies a c.1.9% benefit versus expectations making the guidance around 1% ahead overall."