Analyst Note| Damien Conover, CFA |
GlaxoSmithKline reported fourth-quarter results largely in line with our expectations, and we don’t expect any major changes to our fair value estimate. Importantly, the company confirmed the separation of the consumer business in 2022, and the combined dividend of the remaining core biopharma and the new consumer company would be lower than the current dividend. The magnitude of the dividend cut will likely be communicated in June along with long-term growth expectations. We believe the cut will be substantial, potentially as much as a 30% to 40% reduction, since Glaxo has messaged a return to a progressively increasing dividend following 2022 for the biopharma group, which will be easier to achieve if the 2022 cut is larger. From an operational standpoint, we don’t view the dividend cut as signaling an unhealthy business but rather the firm's desire to invest more in the biopharma’s innovative pipeline. With less dividend payments, we expect investment in innovation to increase and ultimately lead to faster earnings growth and eventual dividend increases after 2022. The increased investments in innovation should further support Glaxo’s pipeline and wide moat.