We examine interim results from two of Neil Woodford's favourites.
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There were a couple of interim results out today that I've been keenly awaiting -- GlaxoSmithKline (LSE: GSK) and British American Tobacco (LSE: BATS). My reasons are twofold...
Firstly, it's because I'm moving more towards dividend investing in my old age, especially during these dark economic times when growth investing can be too risky. In that I'm a keen follower of Neil Woodford, who holds both these shares in his portfolio. The Motley Fool report "8 Shares Held By Britain's Super Investor" examines these two plus six others -- you can get your free copy by clicking here.
Secondly, I chose GlaxoSmithKline for the Motley Fool's educational Beginners' Portfolio last month, and British American is another that I have on my radar for a possible future purchase -- or possibly its competitor, Imperial Tobacco (LSE: IMT), which gave us an update yesterday. So how did they do?
Glaxo profits squeezed
Well, both actually disappointed the markets and saw their share prices fall a little. GlaxoSmithKline is down 14p to 1,432p, though that is only 1%. The reason is that the firm didn't quite hit its targets, with competition from generic drugs hitting both revenues and profits, as governments across Europe seek to cut health spending. Of course, that record $3bn fine the company was hit by as a result of drug mis-selling didn't help.
Turnover for the second quarter, at £6.5bn, was down 4%, with operating profit falling by 2% to £1.7bn. For the six months we saw revenue fall 2% to £13.1bn, with operating profit dropping 1% to £3.8bn. But the second-quarter dividend was lifted by 6% to 17p, and a similar rise in the full-year dividend would bring us a nice yield of 5.2%.
Sales for the full year to December are now expected to be flat.
None of this should really come as any surprise, as it has been known for some time that Glaxo is in a transitional phase, moving away from a pure "blockbuster" drug model and more towards new biotechnology.
But British American profits up
The reason for British American Tobacco's small fall, of 12p (0.4%) to 3,296p, is harder to grasp. Although the firm, which currently sells more than 200 brands around the world, did suffer from unfavourable currency exchange due to a strengthening pound and reported flat first-half revenues of £7.5bn, it did record a 3% rise in pre-tax profits to £2.9bn and a 6.6% rise in earnings to 102.4p per share.
The interim dividend was lifted by 11% to 42.2p, which is very well covered, and implies a yield of 4.2% by year-end.
What I like about the tobacco business (as an investor, at least -- I'm leaving moral judgments to individual investors), is that worldwide demand is growing at a pace that more than offsets sales squeezes in the developed West, as people in growing Eastern economies increasingly see the stuff as a more affordable luxury.
For British American Tobacco, this is what should bring in a similar profit performance in the second half, despite the expected continuing strength of sterling.
What do I think?
I'm still happy to have GlaxoSmithKline in the Beginners' Portfolio, and I expect it to keep on providing nice dividend growth for years to come. And my liking for British American as a potential purchase is strengthened too.
Another sector I'm going to be turning to in my search for Beginners' Portfolio purchases is Oil & Gas. Whether I'll go for one of the big producers, or a smaller explorer, remains to be decided. But either way, I'll be consulting "How To Unearth Great Oil & Gas Shares", the very latest free report put together by Motley Fool analysts. You can get your own copy by clicking here.
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> Alan does not own any shares mentioned in this article.