Growing optimism and a £2bn investor payout is a shot in the arm for this British giant

Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.

Last week’s full-year results from GlaxoSmithKline (GSK) do not answer every concern the sceptics may have regarding current cash flow, the near-term trajectory of the vaccines business, or the long-term potential of the drug development pipeline but they offer no further nasty surprises.

Better still, the outlook for 2025 is a little better than expected – the dividend is growing, and management feels sufficiently confident to sanction the first major share buyback since 2013. That £2bn programme equates to more than 3pc of the current stock market value and adds to the firm’s valuation appeal, since GSK already offers a dividend yield in excess of 4pc and comes on a price-to-earnings ratio of barely 11 times, a figure that represents a discount to global peers.

For 2024, an increase in sales of 7pc, core operating profit of 11pc and core earnings per share of 10pc all met management’s guidance and analysts’ forecasts. Even if they came in at the bottom of the range that still helped to soothe investors’ nerves, which had jangled amid signs of a slowdown in demand for vaccines in China – confirmed overnight by America’s Merck – and a change in regulatory guidelines for Covid jabs for the over-60s in the USA.

The vaccines business – where GSK is among the global leaders – did show a second consecutive sharp drop in sales in the fourth quarter, thanks to a 19pc decline in sales of flu jabs and a 52pc plunge in respiratory treatment Arexvy. However, the Specialty Medicines business helped to take up the slack, thanks to a surge in the sale of cancer drugs Jemperli and Zejula.

To offer further encouragement, Dame Emma Walmsley, the company’s chief, offered a more optimistic outlook than expected for 2025. The company steered expectations toward an increase of 3 to 5pc in sales, 6 to 8pc in core operating profit and 6 to 8pc in core earnings per share, compared to analysts’ estimates of 2pc, 6pc and 5pc, respectively.

This confidence is reflected in an increase in the full-year dividend for 2024 to 61p a share, and a target of 64p for 2025.

Such largesse shows management’s faith in GSK’s financial position and its future pipeline of new drugs, which the company continues to develop through its own research and acquisitions, such as Tesoro, Affinavax, Bellus Health – and now this year’s $1bn swoop for IDRx.

The company seems to be through the worst so far as the American lawsuits regarding Zantac (ranitidine) are concerned,although shareholders must still wait on the decision due from the Delaware courts this summer on the remaining 7pc of cases.

The potential implications of the appointment of Robert F. Kennedy Jr. as the US Secretary of Health and Human Services must also be assessed, should the Senate confirm his nomination. A change in regulatory guidelines for Covid jabs for the over-60s in the USA is already weighing on GSK’s vaccinations business, one of the world’s largest.

Specialty Medicines must therefore continue to perform and, if GSK is to meet its goal of increasing sales by a third to £40bn by 2031, the company’s drug development pipeline must deliver across its four target therapeutic areas of infectious diseases, HIV, oncology and respiratory/immunology. The lowly valuation at least implies that expectations on this front are still fairly low, and this is where the upside potential lies.

Questor says: buy
Ticker: GSK
Share price at close: £14.65

Update: Dowlais

An out-of-the-blue bid for Dowlais from American Axle & Manufacturing suggests we are on the right track with the automotive components and metallurgy specialist, and investors can now assess how the unsolicited approach plays out.

Upon launch at the end of January the cash-and-stock offer equated to 85.2p a share, including a dividend of up to 2.8p. That would give us a small profit but the implied premium relative to the undisturbed share price is just 25pc. Shareholders could be forgiven for holding out for a higher price, especially as the implied valuation comes to barely four times earnings before interest, taxes, depreciation and amortisation (Ebitda), once Dowlais’ stock market price tag is adjusted for debt, cash, leases and pensions.

The share price is trading well below the offer price, suggesting American Axle may need to come back with more, or at least increase the cash portion, if it is to prevail, especially as Dowlais’ financial and operational performance is at a low ebb at the moment. The share price had already begun to tick higher before the predator pounced and it may not take much for that trend to continue, given how low both expectations and the low valuation look right now.

Questor says: hold
Ticker: DWL
Share price: 69.85p

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