Glaxo Undervalued as it Exits Potential Pfizer Deal

While we believe Glaxo will continue to support its dividend, management hasn’t provided guidance beyond 2018 regarding the amount. Concerns about the acquisition of Pfizer’s consumer division leading to a dividend cut surfaced on Glaxo’s third-quarter earning conference call last year. Given the high dividend payout ratio--just above 75%, based on our estimate of core 2018 earnings--worries about a dividend cut are understandable. However, we expect Glaxo to post 4% average annual earnings growth over the five-year period following 2018. Further, although 2018 earnings face potential pressures from generic Advair, we expect strong growth in HIV drugs and steady vaccine growth to mitigate this. Given the expected steady earnings growth, we expect the payout ratio will fall to a more manageable level over the next five years.

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