GlaxoSmithKline PLC (GSK)

An interesting story. One of the benefits of this company is that there is not just one big drug. They are well diversified. They are expanding their franchise into the developed world. One issue is a drug that is 20% of their revenue. When it comes off patent it could hurt them, but inhalers are difficult to make as generics.

He is not in pharmaceuticals currently. Has looked at this a couple of times, but there is not enough growth for him. Management in this type of company are out purchasing other companies. He would pass on these right now, because there is not enough underlying growth. Growing at about 2%-3% and he likes to see quite a bit more than that.

Although listed in the US, this is really a European name, but diversified across about 140 different countries. Even though they may not be as diversified as its peers, they have a pretty decent focus and mixture. Focused mainly on vaccines and drug R&D, but also have some pretty well-known consumer product brands that people are familiar with. The issue is that it is a little bit more focused on the hefty dividend payment. Payout ratio is about 70% while its peers are more like 50%-60%. Because of this the multiple is lower, and trades at a discount to the others.

No different than the other pharmas except that they moved into vaccines, which have benefited them. The great thing about the pharma stories is that they are defensive when things are difficult. Great dividend yield. Throws off lots of free cash. You won’t see the multiple expansion that they had years ago.

Their product pipeline and ability to make acquisitions are strong, despite the bribery charges. He can’t comment on them.

Pay out about half of their earnings so the payout could go higher as you go along. 4.5% dividend.

(A Top Pick Jan 5/12. Up 1.41%.) He has a pretty good exposure to Pharma groups. Starts with a basket of them and then works into the strongest positions. Sold this one. This group looks like it has broken out of a 12-13 year base and likely could trade higher from here over the next 2-3 years.

Pharmas have been victims of their own success. In the late 80s and early 90s, they had incredible blockbuster products that were highly valuable from a revenue point of view. That has not happened in the last little while. Now that they are not growth stocks, they won’t have the high multiples anymore. He would prefer something like Johnson & Johnson (JNJ-N) or Abbot (ABT-N), which are much more diversified.

Going to be really challenged from a growth perspective in the next little while. Feels the 4.58% dividend is safe.