Data from FE Analytics shows it is a top-10 holding in 76 out of 98 funds in the IMA UK Equity Income sector.
However, the company has been struggling with the expiration of patents on some of its most profitable drugs, as well as bribery allegations in China.
Both are threats to the company’s long-term profitability and have led some contrarian managers to shun the stock.
Baillie Gifford’s Dominic Neary told FE Trustnet last month that the company was a “yield trap”, with limited scope for future earnings growth.
So should private investors run with the crowd on this stock or steer clear?
Source: FE Analytics
The effect of the bribery allegations on its most recent set of results are easily apparent – but they have had little impact on the overall figures.
Performance of stock over 1yr
Source: FE Analytics
Turnover in the emerging markets and pacific [EMAP] regions in the third quarter of 2013 – to the end of October – was down just 9 per cent on the same period last year, although operating profit was down 22 per cent.
EMAP makes up just 16.4 per cent of revenue, however, down from 18.4 per cent, and operating profit from that region was 20.2 per cent, down from 26.42 per cent.
Group revenues were flat, helped by increases in Europe and the US, while operating profit was down 5.3 per cent thanks to currency adjustments, but up 1 per cent without these effects.
This is despite a fall of 61 per cent in revenue from China, which underlines how insignificant the country is to the firm's current profile. Arguably, however, this implies the worst is yet to come.
The Chinese economy is expected to grow faster than other major economies over the coming years and to see growing demand for better healthcare services from a burgeoning middle class.
If Glaxo is hampered from expanding into China, this could weigh on the company’s relative performance in the future.
By comparison, in its third-quarter results for this year, AstraZeneca announced revenue growth of 17 per cent in China and 2 per cent in emerging markets overall.
A number of high-profile managers still find value in the stock, however.
Anthony Cross and Julian Fosh told FE Trustnet last week that they were impressed by the efforts the company has made to expand its distribution of other companies’ drugs to replace sales of its own expiring patents.
However, any long-term case for the stock is likely to rest on the company’s ability to regenerate its pipeline of new drugs.
Ben Ritchie, co-manager of the Dunedin Income Growth trust, says the company has already made great strides in this direction.
“A number of large UK businesses have been on the same journey over the past five years: having been institutions, they have become companies,” he said.
“Glaxo had been through a phase where the successes of the past were holding it back – Advair [an asthma treatment now out of patent] was 30 per cent of profits, so it had to pedal very hard to make up. It’s now starting to see the results of that pedalling.”
The company currently has 31 treatments undergoing Phase III trials – the most rigorous testing stage and the final one before approval for use. AstraZeneca has just eight such treatments.
Advair revenues slipped just 1 per cent in the previous quarter, and the company has highlighted the difficulty its competitors are having in producing generic copies. However, it is reasonable to presume that the bad news is still to come here, too. It made up 23 per cent of revenues in the third quarter.
Some estimates suggest the company stands to lose 5 per cent of its share price value as the revenues dry up.
Ritchie also notes that the company’s disposal of non-core assets such as its consumer brands Lucozade and Ribena – sold to Japanese company Suntory in the last year – is another sign that it is getting a grip on its problems.
While AstraZeneca’s drugs pipeline is less impressive, shares have been suffering correspondingly.
Astra lagged Glaxo until the Chinese controversy hit the latter’s shares, but it is still much cheaper.
While GlaxoSmithKline is trading on 20.4 times earnings, falling to 14.3 times next year, AstraZeneca is on 15.4 times, falling to 11.2 in 2014. Thanks to this, it is yielding more than Glaxo – currently 5.8 per cent.
This dividend is covered much better on Astra, however, at 1.8 times to 1.15 times. The drawback is that earnings estimates for Glaxo are much rosier, with the market expecting Astra to see revenue falls for the next three years.
Glaxo seems the less risky option, although it is significantly more expensive. Although Astra’s revenues are expected to fall, the dividend should still be covered and will be higher in the short term.
The latter company also has the benefit of growth in China to look forward to, which could well be less dependent on the strength of its new drug pipeline.
Ritchie also holds AstraZeneca, and he gives the new boss Pascal Soriot a vote of confidence for his record at Roche and Genentech.
AstraZeneca is at an earlier stage in its recovery cycle and on valuation grounds looks the better buy.
