The first meeting of the Bank of England’s monetary policy committee, or MPC, is likely
to be the focal point for economists this week. Governor Andrew Bailey will announce
the latest decision on interest rates and Quantitative Easing, or QE, on Thursday 4th
February.
Mr Bailey and his colleagues seem to be doing a bit of a hokey-cokey on the subject of negative
interest rates – a situation which means you would be charged for keeping your money
in the bank. The MPC is investigating whether it could boost the economy by persuading savers
to take their cash out of the bank and spend or invest it and also encourage more borrowing
by consumers or corporates. It would also help the Government with its interest bill
on its total borrowings, which have now topped the £2 trillion mark.
But the San Francisco Federal Reserve produced a paper last which just buried the concept
of negative rates, saying there is a case to be made that they do more harm than good.
Negative interest rates don’t seem to have done much to help Japan’s economy, they
hammer banks’ lending margins and profits (and therefore their ability and willingness
to lend, hampering and not helping credit flow) and there is also the risk that people
just stick their cash under the mattress. In addition, negative rates could prompt a
speculate bubble in financial markets, as investors feel compelled to do something with
their cash, or at least prompt malinvestment and waste of cash in projects that would never
get off the ground if there was an actual cost to money.
We shall see but for the moment, the Bank of England’s headline base interest rate
is 0.1% and the QE, bond-buying programme so far has come to £895 billion after the
£150 billion increase in November.
Company news flow is going to be plentiful in the week ahead. Around a dozen of the FTSE
100’s members will produce results or a trading statement in the coming week. A good
number of small and mid-caps are due to the same and names which may be worthy of further
research include the following, although please do note that the dates can be subject to change:
• BP, SSE and Virgin Money UK on Tuesday 2nd February
• Glencore and Vodafone on the 3rd
• And Royal Dutch Shell, BT, Severn Trent, Unilever, Compass and Barratt Developments
on the 4th
But for all of those the name perhaps the stock most capable of causing a fuss in the
week ahead is pharmaceutical giant GlaxoSmithKline, which is due to report full-year results on
Wednesday 3rd February.
The shares are down by a quarter over the past year, twice as bad as than the FTSE 100’s
slide of around 12%. In fact, GlaxoSmithKline ranks 85th in the FTSE 100 in terms of its
share price performance over the last 12 months.
This seems odd when you consider the rush to defensive stocks as the pandemic broke
just under a year ago and that GlaxoSmithKline is the world’s leading provider of vaccines:
it has a 30% global market share and produces and distributes about two million vaccines
a day worldwide for everything from meningitis to whooping cough and from hepatitis to ‘flu.
Possible reasons for the turgid share price performance include the company’s recent
pedestrian earnings and dividend growth profile (of which more shortly), some lingering concerns
among analysts about weak dividend cover (to which we shall also return) and also disappointment
that the company seems slow off the mark in the race to beat COVID-19.
GlaxoSmithKline is working with France’s Sanofi on a vaccine but the pairing admitted
to disappointing trial results back in December. A new study will begin in February with a
final trial in the second quarter and regulatory submissions in the third. Should all go well
the vaccine will then be available later this year – but that’s well behind the treatments
from Pfizer/BioNTech, Moderna, and Oxford/AstraZeneca, and others.
Analysts will look for an update on the COVID-19 vaccine but in terms of the numbers they will
look to three headline figures:
• The first is sales, as this will indicate how GlaxoSmithKline’s new drugs are helping
to compensate for the loss of patent protection on older ones. In the third quarter sales
fell by 5% on a constant structure basis and by 3% including structure changes and excluding
currency movements. Note how momentum has tailed off in the past two quarters and the
company has attributed this to COVID, as visits to doctors and hospitals were limited owing
to lockdowns.
On a divisional basis, including structure changes but excluding currency movements,
third-quarter sales at Pharmaceuticals were down 3% year-on-year, Vaccines rebounded to
rise 9% and Consumer Healthcare rose (thanks to a merger deal with Pfizer - excluding that
sales fell 6%). This chart shows the constant currency progress since Q1 2017, just before
Emma Walmsley took over as chief executive.
• The second key number is earnings per share. At the third-quarter stage in October,
Emma Walmsley forecast that adjusted earnings per share, or EPS, would come in at the lower
end of the forecast range of down 1% to down 4% for the year, against last year’s 123.9p.
Analysts are looking for adjusted EPS of 116p in 2020. Just important will be any guidance
given for 2021 when the consensus forecast is currently for pretty flat adjusted EPS
at 116.4p – hence my earlier point about concerns over GlaxoSmithKline’s pedestrian
earnings progress as the market waits for pipeline and strategic developments to turn
into profits.
• Finally, analysts and investors will look at the dividend where an unchanged full-year
payment of 80p per share is expected (implying an unchanged fourth-quarter distribution of
23p a share. GlaxoSmithKline has not increased its dividend since 2014 and earnings cover
for the dividend is lower than ideal at around 1.5 times, according to consensus analysts’
forecasts, even using the adjusted earnings per share numbers, when a cover ratio of 2.0
times would give greater comfort.
On a more qualitative basis, analysts will look towards the pharmaceuticals business
and its pipeline.
GlaxoSmithKline’s second best-selling drug is still bronchitis treatment Advair but that
is now off-patent and faces generic competition, so sales are falling. HIV treatment Triumeq
now generates more revenues and the company will be looking to show that its new products
are selling and that has plenty more in development. GlaxoSmithKline’s pipeline of new drugs
is filling – it has 40 medicines and 18 vaccines in development, from Phase I to Phase
III trials, and analysts will look for progress reports here and any new product filings.
In addition, analysts will look to updates on four drugs in particular. They are shingles
vaccine Shringrix, HIV treatment Juluca which are both already on sale and cancer drug Zejula
and bone marrow cancer treatment Blenrep, both of which received regulatory approvals
in 2020.
I hope that you and your families are all in good health and good spirits during these
difficult times. Thank you for listening and I look forward to talking to you again next
week.