When I write finance articles, I aim to motivate anyone who seeks self-improvement about the opportunities available to them and the specific steps that are necessary in order to carve out a better life. Often, this leads to discussion of business ownership, as a long-term investment in a well-chosen investment can often provide you with the economic resources that will best help you fulfill your duties to your family, your work, and your other activities. Within this backdrop of general optimism, I also seek to strike a cautionary note so that expectations are calibrated appropriately.
GlaxoSmithKline provides a useful example of what I mean by expectation calibration.
For almost all of the past fifteen years, the British pharma and consumer healthcare company has not seen its valuation increase. Pick almost any year in the past generation, and you could likely find the opportunity to purchase the stock somewhere in the $40s or $50s. If you had a short-term mindset, or expect your investment holdings to nealy outperform the S&P 500, then GlaxoSmithKline hasn’t been the stock for you.
But for those who take the broader view, recognizing both that even best-in-class healthcare businesses like Abbott Laboratories and Johnson & Johnson have underperformed for years on end and that also choose to analyze the company itself, GlaxoSmithKline looks more promising than its track record of investment performance would suggest.
First, it should go without saying that GlaxoSmithKline is a cash-generating behometh. It sells $42 billion worth of healthcare products per year, with over $7 billion flowing into the company’s coffers each year as cash flows. The company, which has a longstanding policy of paying out 70-80% of its cash flow per share as dividends, returns over $5 billion to shareholders each year in the form of dividends.
If you only looked at the business developments, and paid no regard for the stock price, you would be excited about the assets that are contained under the GSK umbrella. It just bought out Novartis’ stake in their joint venture in the consumer healthcare industry, meaning as of 2019, GlaxoSmithKline will have full operational control and have a right to all the profits that come from Sensodyne toothpaste, Panadol headache pills, and Voltaren gels that soothe muscle pain. These are the types of brands that have a multi-generational runway of earnings growth ahead of them. Even more importantly, these are the types of brands that will keep churning out cash profits when the next recession arrives.
These healthcare brands will have the effect of soothing out the inevitable fluctuations that occur on the pharmaceutical side, though right now, Glaxo’s portfolio is boasting robust growth from small-scale HIV drugs Triumeq and Trivicay (which, as the CEO noted in the last annual report, sport year-over-year sales growth of 41% and 43%, respectively).
For those who take a businessmanlike approach to their Glaxo investment, immense income awaits those who patiently hold their shares. Although the dividend fluctuates with the cash flows, the 2018 dividend payment for ADR holders should be somewhere near $2.50 per share.
With recent prices of the stock near $40, this is a starting dividend yield of 6.25%. That is a fantastic opportunity to load up on shares of a true healthcare cash cow. Make this wildly conservative estimate: assume no reinvestment of any payments over the next sixteen years, and assume that the payout does not grow at all over that time frame. Even with these super-conservative investments, you are looking to get all of your money back within sixteen years via dividends alone. If you reinvest the dividend payouts, and make the reasonable assumption that the cash payout will grow at a mid single digit rate over the next decade, you stand to recoup all of your capital within the next decade.
For those who seek substantial dividend income in the publicly traded markets, GlaxoSmithKline is a blessing to discover. The reinvestor gets to pick up 12 new shares from reinvestment for every 100 shares that he holds onto for two years. Alternatively, if he collects the cash payouts, he is finding one of the best ways to passively earn $1,000 per year in dividend income from an initial investment of $10,000.