If you had reinvested your dividends along the way, you would have enjoyed a 116% return on your money by owning GlaxoSmithKline shares in the nine years since Sir Andrew Witty became chief executive. That record is much better than the FTSE 100 index’s, but poorer than AstraZeneca’s, which is one reason why the perception persists that GSK has been a laggard.
In its sharpest form, the theory runs that GSK would be better broken up into its constituent parts – pharmaceuticals, consumer healthcare and vaccines, plus the ViiV joint venture in HIV therapies. Lauded fund manager Neil Woodford once described GSK as being four FTSE 100 companies bolted together.
Witty, as he heads for the exit next month, refrained from taking a serious pop at the break-up brigade, but he would have been entitled to do so. GSK, with 100,000 employees, may seem out of tune with the fast-and-nimble mantra, but its structure – cemented via an asset swap with Novartis in 2015 – works. Witty was able to boast that all three main divisions are currently increasing their profit margins and gaining market share. “Those are for me quite hard-edged demonstrations of performance,” he said. Fair point.
In pharmaceuticals – focus of many of the grumbles – there is no evidence that innovation has suffered. About 27% of the division’s sales are being generated by products launched in the past decade, a high score on a measure the industry regards as important. That ratio is flattered, in a back-to-front sense, by the decline of blockbuster asthma drug Advair, where sales have fallen from £2.8bn in 2013 to £1.8bn last year, but the development pipeline looks healthier than it has for years.
Advair will dominate at least one more set of financial figures. The timing of the launch of generic competition could make the difference between earnings improving 5%-7% or being flat to slightly down in 2017, said GSK. But then the next big patent expiry doesn’t arrive until the late 2020s. It’s a promising position.
Let’s hope Emma Walmsley, Witty’s successor, also takes a dim view of the break-up idea. Developing pharmaceuticals is always risky, and could become more so with Donald Trump determined to cut prices (as Hillary Clinton would have done). It seems reasonable to balance those risks with annuity-like toothpastes and hard-to-manufacture vaccines.
No corporate structure has to be permanent, but Witty leaves a business showing core operating profits up 36% to £7.7bn in 2016, albeit helped by the fall in sterling, and a dividend that finally looks safe. Walmsley should avoid supposedly exciting cures. GSK isn’t ill.
Rio needs more rigour
They preach a gospel of capital discipline at Rio Tinto these days, as they should after a recent history of squandering cash on the wrong assets at the wrong time.
The most notorious deal was the top-of-the-market purchase of aluminium producer Alcan in 2007 for $38bn (£30bn) – in cash, disastrously. Only 18 months later, Rio was in the humiliating position of trying to flog assets to China before its shareholders called a halt to the madness and backed a rights issue. Or recall the misadventure in Mozambique. A $4bn purchase in 2011 produced a $3bn write-down in 2013 when the expected permits to transport coal along the Zambezi river did not turn up.
That farce produced a chief executive who was serious about cutting costs and avoiding rash bets. Full judgment on Sam Walsh’s reign must await the outcome of a bribery investigation concerning an iron ore project in Guinea, but Rio Tinto did start to concentrate on maximising cash. A rebound in the prices of copper and iron ore accelerated the process. Thus new chief executive Jean-Sébastien Jacques, after a 12% improvement in underlying earnings to $5.1bn, found himself in the happy position of handing a few winnings to shareholders only a year after Rio cut its dividend.
But there is an oddity. Rio is distributing $3.1bn in dividends and also launching a $500m share buy-back. Why a buy-back, as opposed to a special dividend? Jacques said the problem with specials is that “people forget, about five minutes afterwards”, that you’ve paid it. What? If you’re in the capital discipline game, shouldn’t you be assessing the price of the asset you’re buying?
Mining, a feast-or-famine business, is littered with examples of horribly timed buy-backs. Remember Glencore, paying 300p in 2014, just before its share price fell to 80p. Rio may be luckier, but one expects more rigour.
No fear in construction
How is Sajid Javid’s white paper on the “broken” housing market going down? Are investors terrified by the sanctions that await any company hoarding land and not contributing to the government’s new construction targets? No. After Tuesday’s across-the-board gains in the sector, three of the top 10 risers in the FTSE 100 index on Wednesday were housebuilders. Investors spy a tame report – and they are surely right.