This post is a departure for me as I usually just blog about the stock purchases that I make so that I can come back and see what I was thinking when I purchased them. But after doing some research for the next version of my UK Dividend Champions List (to be released around 4th Jan), I thought I’d write about some of the companies I looked at. So here’s the first part of my eclectic view of the UK’s Pharmaceutical dividend stocks as a sneak peak at the List update next week.
I intend this article as a stepping-stone for more detailed analysis by the reader if any company looks interesting. I came across some general guidelines for analyzing pharmaceutical companies in my web travels that may be useful if you’re doing further research into this industry.
UK Pharmaceutical stocks
Pharmaceutical companies have the potential for amazing growth; had you bought $1,000 worth of shares in Mylan Inc (MYL) back in 1976, your investment at the end of the year 2000 would be worth $1.5 million; half as much again as the $1 million you would have obtained from a similar investment in Berkshire Hathaway (BRK) through that same period. However it’s also fraught with expensive research, testing and regulation that can end in failure in the quest for a cure. In addition, once a drug is patented, it is protected for only 20 years after which competitors can make their own generic versions and typically the actual protected duration is nearer 10 to 12 years when time for clinical testing is included.
Dividend Contenders (10-24 years of dividend growth)
Genus plc (13 years)
Genus plc (GNS) was formed in 1994 from the Breeding and Production Division of the UK Government’s Milk Marketing Board when that agency was disbanded. It acquired American Breeders Service (ABS Global) in 1999 and the Pig Improvement Company (PIC) with its purchase of Sygen International plc in 2005. It operates in three segments; Genus ABS (dairy and beef products), Genus PIC (porcine products) and Genus Asia (both porcine and beef products for Asia). The company has a £762M market cap.
Genus has increased its dividend for 13-years on a Calendar Year basis (and FY basis too) since 2001 when it failed to increase its 2001 dividend. I’ve only been able to find the dividend history as far back as the year 2000, so I don’t know how long it’s been paying dividends in total.
It has averaged a 10-year dividend growth rate of 10% and offers a 1.4% yield. The Payout Ratio is low and has stayed in the 40-20% range over the last 10 years with a current payout ratio of 35%. Dividend Cover is 2.7x and Net Gearing is 47%.
The company does seem to be fairly committed to a progressive dividend growth strategy and it’s included as one of their Corporate Goals. Two of the main future risks increasing this year as identified by the company were volatility in China with growing the business and outbreak of diseases affecting livestock such as an outbreak of PEDv in the US that affected the porcine industry.
Price/Earnings is high at 26.7 by US standards where the S&P has an average of 18.7. The company’s P/E value is quite high overall over the last 10 years and has been >= 20 for the last 4 years, being a little bit lower this year. Estimated EPS growth next year is 9%.
Analysts in general seem quite bullish on this company with more buy recommendations than hold on Morningstar. For me the dividend yield isn’t high enough to justify an interest however.
Dechra Pharmaceuticals plc (11 years)
Founded in 1997 from a management buy-out, Dechra Pharmaceuticals (DPH) manufactures veterinary products, operating in two divisions – US Pharmaceuticals and European Pharmaceuticals. In 2003 it sold its Services segment and the company is now focused on veterinary pharmaceuticals and related products. Dechra has a £735M market cap.
Dechra has increased its dividend for the last 11 years on a CY basis (as well as FY), having failed to increase its dividend in 2003. It first started paying dividends in 2001.
The company has averaged a 12% dividend growth average over 10-years with a 10% increase from last year. The dividend yield is 1.8% with a Payout Ratio of 65%, an improvement over last year’s 100% value. Prior to 2011 the Payout Ratio was typically less than 50%, in subsequent years it’s always been higher so there is a risk that the dividend growth isn’t sustainable at these levels. Dividend Cover is 4.4x and Net Gearing is 23%.
Dechra does not define a specific dividend policy in their Annual Report; their strategic focus is to generate growth and shareholder value by concentrating on their drug portfolio, delivering the products in their development pipeline and expand via acquisitions. The two increasing risks identified in their report are regulatory risk and a risk of being short of suitable personnel for the planned goals and projected growth.
Valuation is high with a P/E of 37, although the P/E has been higher than 20 every year since 2008. Estimated EPS growth next year is 29%.
Their latest product, brand name Osphos, was approved for launch this year and they have four products in their development pipeline that are due for completion in 2015.
Analysts over at Morningstar like this company with 6 out of 8 recommending a buy. I think I’d want to wait for a lower price and a higher dividend yield.
Shire Pharmaceuticals Group plc (NEW – 11 year)
Shire Pharmaceuticals (SHP) will be a new addition to the List in January. I’d previously estimated them as a 3-year dividend growth stock based on Yahoo data so they weren’t included, but after further research they have gained entry.
Shire is a global pharmaceutical company headquartered in Ireland that focuses on developing products for the treatment of rare diseases. Founded in 1986, it now has a market cap of £26B. It operates in four business units – Rare Diseases, Neuroscience, Gastrointestinal (GI) and Internal Medicine. In 2013 Shire derived 41% of product sales from Neuroscience products, 33% from Rare Diseases products, 17% from GI products and 9% from Internal Medicine.
Shire is listed as an ADR in the US Nasdaq exchange with the symbol SHPG.
Shire has increased its dividend each year for the last 11 years on a CY basis (10 years based on FY) since it first started paying dividends in 2004.
This year saw a dividend increase of 9.8% over last year’s dividend income. The 10-year growth rate is even higher at 28%. The dividend yield is low however at 0.28% although sustainable given the low Payout Ratio of 6%, a number that is within the typical range of 7-10% over the last ten years. Dividend Cover is 15x and Net Gearing is 8%.
The US ADR shows only a 1-year increase due to currency rate changes, so SHPG does not appear in the US Dividend Champions List.
Shire doesn’t state a specific dividend policy in its Annual Report (2013) other than statements about providing value for shareholders. The company strategy is to continue specializing in the treatment of rare diseases. There is no identification of specific increasing risks in the Annual Report, it provides only general risks and mitigations.
Shire’s P/E is currently 22.5, pretty much in line with its average value since 2009, and the P/E has always been 20 or higher during that period. Years prior to 2009 saw high levels of 40 mixed with no defined value due to negative income. Estimated EPS Growth is 8%.
Shire was a target acquisition of AbbVie (ABBV) this year, although negotiations broke down in October 2014 sending the stock price down by 30%. It has a number of milestones lined up in 2015 from its development pipeline as well as making some promising progress with a fast track FDA approval for its SHP607 ophthalmology candidate.
Morningstar tracks four out of six analysts with a Buy recommendation over Hold. The dividend yield is much too low to interest me and the base currency is in USD so there is potentially some currency risk to the dividend income.
Dividend Challengers (5 – 9 years dividend growth)
GlaxoSmithKline plc (9 years)
GlaxoSmithKline plc (GSK) was formed in 2000 from a merger between Glaxo Wellcome and SmithKline Beecham, and as well as being the largest UK pharmaceutical company with a market cap of £67B, it’s the 6th largest company on the London Stock Exchange. It’s available as an ADR stock in the US with the same GSK symbol as on the UK markets.
GSK operates in three segments: Pharmaceuticals (67%), Vaccines (13%) and Consumer Healthcare (20%). Some popular consumer brands it sells that even I recognize are Beechams, Aquafresh and Sensodyne. Well-known drugs it manufactures are Advair and Paxil. The company was involved in a criminal case regarding its promotion of drugs and agreed to pay $3B to settle the case in 2013 – the largest drug related settlement at the time.
GSK has increased its dividend for the last 9 years on a CY basis – lower dividend payments in FY2005 broke the stretch. If you look at the Financial Year results, then its dividend growth history is even better with at least 23 years of continual dividend growth starting from the earliest date I could find in 1991.
Another thing to like about GSK’s dividend schedule is that dividends are paid quarterly rather than the more traditional bi-annual schedule used in the UK. From a compounding point of view, you can re-invest the dividends earlier for higher potential APY than the less frequent schedule.
Dividend growth in 2014 is a relatively low 4% over 2013, and the 10-year growth rate is 6%. The dividend yield is 5.8% and the Payout Ratio is currently high at 93%. The Payout Ratio reached 200% in 2010 due to a low income and EPS weighed down by high Sales, General and Administrative expenses. Dividend Cover is 1.4x and Net Gearing is 68%.
The US ADR shows only a 1-year increase due to currency rate changes, so GSK does not appear in the US Dividend Champions List.
GSK’s Management have a commitment to dividend growth and share buybacks as mentioned in the 2013 Annual Report and evident from the dividend growth history. The Annual Report does not identify any specific risks as more likely, but includes a comprehensive set of risks and mitigations.
The current P/E of 16.1 is below the S&P average of 18.7. Aside from the low earnings in 2010 causing a P/E of 38, the historical trend for the P/E has been in the 12-18 range over the last ten years. Estimated EPS growth is 4%.
GSK has been questioned about its ability to continue dividend growth based on its lower projections for 2015, although the CEO maintains that the dividend is safe. Although what else would he say? Some good news came recently in the form of a successful trial of a Shingles vaccine. The company is looking for savings in operating costs and will be reducing headcount in the US in 2015. It has also entered into a closer agreement with Novartis – Glaxo gets Novartis’ vaccines in exchange for Glaxo’s cancer drug business and they will jointly create a health care business for their consumer products.
Analysts at Morningstar are mixed on their outlook with a 50/50 split between buy and hold. I would be tempted by GSK – it’s a stable company with a strong commitment to its shareholders and offers a great yield.
Abcam plc (NEW – 9 years)
Abcam plc is another new entry in the List – I was previously tracking this as only having 3 years dividend growth, but the dividend data did not compensate for a 5:1 stock split in 2010.
Founded in 1998, Abcam plc (ABC) makes and sells research tools for studying and modifying proteins. The company is listed on the AIM-100 index and has a market cap of £933M. The company reports under one business unit – Sales of antibodies and related products – since it views all operations as core business.
Abcam was named Company of the Year in the 2013 AIM Awards and Management Today’s Healthcare Company of the Year in 2013, but lost out to RB. and GSK this year.
Abcam has a 9-year dividend growth history by Calendar Year (and also the same history using FY data), and this represents a 100% record from its first dividend paid after being listed on the AIM exchange in 2001.
Abcam’s 2014 dividend was 10% higher than in 2013 and represents a 26% annualized growth over 5 years. The current dividend gives a yield of 1.6% with a Payout Ratio of 42%, a number that has held steady for the last 3 years. Dividend Cover is 2.2x and Net Gearing is -14%. Not sure how they calculated a negative value – Abcam’s debt is fairly low with a Current Ratio of 5.6
Abcam is a company built by scientists for scientists and Management believe the company has a defendable moat due to the large amount of product data acquired over 16 years as well as established supplier relationships and efficient logistical support. The Annual Report included two areas that needed improvement – high staff turnover and subsequent recruitment as well as health & safety issues in a production site in China, otherwise the report states general risks and mitigation topics.
The current P/E ratio is 27 – a figure that has held steady since 2011. The P/E for Abcam has never been less than 20 since 2004, reaching peaks of 73 and 68 in 2004 and 2009 respectively. Estimated EPS growth is 9%.
Analysts followed by Morningstar are mixed; 2 say Buy and 3 say Hold.
Abcam doesn’t develop drugs as such but rather facilities research. There will always be a market for research and so this may be more of a defensive stock than other pure pharmaceutical companies. It’s a company that’s probably worth keeping an eye on.
- Dividend Cover and Net Gearing values are from Investorease. The Investorease values are significantly different from those at Morningstar.co.uk so please check your own sources for more accurate details.
- Estimated EPS Growth values from Morningstar.co.uk (Financials & Ratios > Ratios tab)
- P/E Values from Morningstar.com (Valuation tab)
- Investorease.com is possibly the best site I’ve come across for UK dividend history records, but it’s not always correct either. Likewise with Yahoo Finance. The majority of other sites only keep a 5-year record, if that.
- Dividend History data is compiled from Annual Reports / Company website as the golden source when available. Yahoo Finance data is cross-checked with Investorease data and errors corrected if possible (typically arising from stock-splits, special dividends and currency rates).
Disclosure: I don’t own any of the stocks or companies listed in this article and have no intention to buy any shares in them.
Quote of the day
Research is what I’m doing when I don’t know what I’m doing.