The 2013 Outlook For GlaxoSmithKline

Published in Company Comment on 30 December 2012

What's in store for GlaxoSmithKline's (LSE: GSK) shareholders in the year ahead?

In this festive mini-series, we look at the 2013 prospects for some of your favourite FTSE 100 (UKX) shares. Today, it's the turn of GlaxoSmithKline (LSE: GSK) (NYSE: GSK.US), whose shares have fallen 7% during the course of 2012 compared with a 6% rise for the Footsie.

In a Q3 update released at the end of October, Glaxo reported group sales down 5%. The drop was partly due to demanding comparisons with the prior year Q3, but also to continuing weakness and additional austerity measures in Europe, where sales were down 9%. In contrast, there was good growth in emerging markets, developed markets outside of Europe and in the consumer healthcare division.

Glaxo expects sales for the full year to be "broadly in line with 2011, absent a further deterioration in Europe". So, flat sales -- and a modest drop in earnings per share (EPS) according to analyst forecasts -- are the things to look out for when the company announces its annual results in early February.

Despite the uninspiring numbers for 2012, which are not likely to improve much in the immediate future, Glaxo is delighted with the recent progress of its late stage drugs pipeline, saying: "This year has been exceptional with output better than in any previous period for the company." That bodes well for the longer-term future, and management is already actively preparing for the roll-out of multiple new products.

Shareholders can look forward to plenty of drugs pipeline news in 2013, and also to more news on Glaxo's strategy of diversifying further into emerging markets and consumer healthcare. Just last month, the company announced plans to increase its ownership of its publicly listed Nigerian and Indian consumer healthcare subsidiaries to the maximum permitted under the rules of the two countries' stock exchanges.

So, can Glaxo's shares improve on their lacklustre 2012 performance in 2013? Analysts are forecasting EPS and dividend growth a little above inflation for the year ahead. At a recent share price of 1,364p, the forward price-to-earnings (P/E) ratio is not much more than 11, while the dividend yield is 5.7%.

I'd say the P/E is about fair, given the possibility of further deterioration in European markets on one hand and, on the other, the potential for positive newsflow on new drugs, emerging markets and consumer healthcare.

Whatever I may think about the P/E, though, the dividend yield and the prospect of the dividend growing ahead of inflation look mighty attractive. The share price could move higher in 2013, but if it doesn't then the dividend will provide investors with nourishment while awaiting the sustained improvement in long-term financial performance and overall returns to shareholders that Glaxo's management seems confident of delivering.

Ace City investor Neil Woodford has trounced the market over the past 15 years by focusing on strong cash-generating and dividend-paying companies such as Glaxo. In fact, Glaxo is currently one of Woodford's biggest holdings.

If you're interested in learning more about this master investor's enormously successful strategy – and about the blue-chip companies he currently favours – I recommend you download the Motley Fool's exclusive report, "8 Shares Held By Britain's Super Investor".

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> G A Chester does not own shares in GlaxoSmithKline.

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