Stocks - BUY - GlaxoSmithKline

It took several months until I pursued another investment in June (P&G). Loaded with funds, my watchlist has finally triggered another buy recommendation on Friday:

The stock of the global pharmaceutical player GlaxoSmithKline (“GSK”) was strongly oversold (-5% price drop) on Wednesday after a disappointing Q2 earnings release:

Group sales in Q2 declined 4% year-over-year (on an ex-divestment and currency adjusted basis) due to significant generic competition and an ongoing bribery investigation in China, which adversely impacted Emerging Markets sales growth. Profitability measured by earnings per share was down 12% (on an ex-divestment and currency adjusted basis) following pricing and contracting pressures.

Overall, results of GSK were well below expectations with both earnings and revenues missing consensus estimates. Following the Q2 release, GSK no longer expects any sales growth in 2014. Furthermore, GSK expects 2014 earnings to be broadly in line (on an ex-divestment and currency adjusted basis) with last year results.

Mr. Market punished GSK very hard for this disappointing quarter. During last week, the stock lost almost 8% in value in only three trading days. The price fell from EUR 19.75 to EUR 18.20.

While I am not satisfied with GSK’s earnings results either, I nevertheless tend to believe in the stock and its dividend potential. Even if one can raise doubts about the stock’s potential as a dividend growth holding - which I believe is an arguable statement as well given the successful dividend growth track record - the current high yoc of above 5.50% qualifies the stock as an attractive income holding.

I take additional comfort in the stock based on the following key facts:

• Among the top ten largest global pharmaceutical companies in the world
• More than 12 years of consecutive annual dividend increases
• Market capitalization of ca. EUR 100bn
• A1 investment grade Moody’s rating
• Sales of GBP 26.5bn and operating profit (EBIT) of GBP 7bn (26% margin) in FY 2013
• Net profit (after taxes) of GBP 5.6bn (21% margin) in 2013
• Ca. 70% dividend payout ratio
• Slightly low equity ratio of 19% but comfortable Total Net Debt / EBITDA of 1.5x
• Added 55 stocks at EUR 18.34

Portfolio - Dividends in Q2 2014

Second quarter of the year 2014 is over and down below you find a summary of the dividends I received during the period.

The portfolio hasn’t changed much in comparison to Q1, but dividends in Q2 are still a bit higher. This is due to the one-time payments I received from the DAX companies Deutsche Post and E.on. As already explained earlier, German companies prefer to reward their shareholders on an annual basis. Therefore, Q2 is not comparable to other quarters of the year. Most investors prefer receiving dividends on a more frequent basis, but I actually don’t mind receiving annual distributions as long as my annual passive income is increasing year by year.

Total dividends received (net of taxes) add up to EUR 159 in Q2. The Deutsche Post dividend represents the largest distribution with EUR 64, translating into a 5.78% yield on cost.

I do hope that there are more buying opportunities in the second half of 2014. At the moment, I am struggling to find reasonably priced stocks and as a result there hasn’t been many investments in 2014 so far. This is a drag on the dividend growth potential of my portfolio and I wouldn't like to have such a situation for the rest of the year.