Wednesday, 23 July 2014

BUY: GlaxoSmithKline price drop buy...Part 3

Price: 1514.945
Shares: 30
Projected annual dividend income: £24 (this purchase) and £121.60 (entire holding)

That's right folks. Another GSK buy in July. So far 100% of my investing funds has gone to the pharmaceutical giant.

In fact, such is the GSK buying frenzy here it now composes nearly a third of my entire portfolio (see current breakdown below and--for a more up-to-date portfolio weighting--visit my Holdings page).

I am rather surprised to find myself tucking away so much of my funds in GSKs direction. indeed, the money had already pretty much been earmarked for one of a number of other investing avenues including a potential new portfolio addition (possibly BAE Systems, Marston's or Old Mutual) or top up (such as SSE or HSBC).

Why did I grab for some more? Quite simply it is to average down my holdings after another 2.5% drop in share price today.

Why did the share price drop? Because the Q2 results had been announced by the company.

So were they all that bad? Yes and no. Certainly they were not the greatest. The headline figures showed a Q2 turnover drop of 4% to £5.6 billion and a core earnings per share (EPS) to 19.1p which was a 12% fall. For the whole, first half of the year they saw a 3% decline in turnover.

Dividend growth maintained

In better news for investors they declared that the Q2 dividend would be 19p per share which represents a 6% growth. However, the eagle-eyed amongst you would have noticed that with the Q2 EPS at 19.1p and Q2 dividend at 19p that is a dividend cover (for Q2 only, of course) of 1 times.

Consequently, I can see why many investors--especially those with a short-term horizon--were looking to jump ship for now.

Why top-up again?

What about me? Well clearly I was doing the opposite and jumping aboard. The reasons being:

  1. Dividend growth--Although clearly unsustainable for the long-term at current dividend cover rates I believe that the cover and earnings will return to healthier levels in the near future;
  2. Novartis deal still on track for completion in the first half of 2015--This will result in a one-off special dividend around about that time. But, more importantly, I think may spell an important shift in GSKs business hopefully for the better.
  3. Research pipeline bubbling along well--According to their report they have over 40 drug in late-stage and in this quarter launched three new ones.
  4. Strong emerging markets growth--They saw a 11% increase I turnover from the emerging markets despite their issues in China causing a 4% push in the other (Chinese sales dropped a hefty 20%!).

Of course, there are worries. They note that Advair--a major contributor to their bottom line--has seen sales decline 14%. What is more, the merging markets growth was weighed down by a general decline globally.

Naturally time will only tell whether things will improve and whether the earnings will shore up the tight dividend cover figure. Nonetheless, I am overall optimistic for GSK in the long-term and as that is what I am in it for, it seems appropriate I moved more of my capital in GSKs direction.

What do you think?

Did anyone else jump on board today with GSKs results announcement? Do you think it is an opportunity or a warning?

[Creative Commons image reproduced from Flickr user Ian Wilson (foolstopzanet)]


  1. Do you have any rule how often you average down? I put myself a rule to never buy on a losing stock if i did not specifically plan that before. The problem is that I don't wanna assign money on bad performers. I would agree that GSK is a stock worth holding but i would rather put additional funds to diversify.

    For now, I am just thinking to write puts in a lower price levels around 35-40 dollars to catch some stocks if they fall further... Hmmm...

    1. Good question. I don't have a rule. I assess it separately each time. I wait to see what the predictions look like and what has changed since my last purchase. For me, the continued drop in GSK does not reflect any fundamental deterioration. Their retraction of the 80p special dividend seems to have played a part. However, as I am holding long-term I anticipate that capital will be better used in the business and will pay dividends--quite literally--over the long term.

      I am happy to average down on a losing stock if--as I say--the investment case long-term still seems sound. For GSK I think this is the case. What I have to assess though is do I want to bulk up my healthcare allocation and whether or not GSK or AstraZeneca is more attractive right now. That is the hard question!

      Other than that, I may just wait for the price to stabilise before considering whether to top up or not!