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GSK will need to cut its dividend, warns Credit Suisse


GlaxoSmithKline PLC (LON:GSK) is likely to have to slash its dividend before long, warned Credit Suisse as it downgraded the pharma giant.

Meanwhile, with the Europea pharma sector at its biggest discount to consumer staples in five years, but strategists expecting investors to rotate out of ‘defensive’ stocks, broker Liberum recommended GSK as one of its top tips for the sector. 

The Liberum analysts said “there are lots of reasons to like European Pharma this year”, including forecasts for 9% earnings per share growth, “a relatively benign US political backdrop” and a 40% P/E discount to the consumer staples sector.

“However, in a world where equity strategists are calling for new market highs and the continued rotation out of defensives, we expect only the value names to outperform,” the broker’s pharma team said, with its top picks as a result being GSK and Novartis, with most caution over Roche.

But back at Credit Suisse, the analysts see various issues for GSK, including the need to pile invest into its research and development (R&D) pipeline and a potential impact on its key vaccines business after the US disease control body advised that COVID vaccines should not be co-administered with other jabs.

Downgrading the shares of the FTSE 100 group to ‘underperform’ from ‘neutral’ and cutting their share price target to 1,400p from 1,580p, the analysts highlighted the mid-term dividend risk for GSK.

Ahead of the Glaxo’s upcoming split into Consumer and Pharma businesses, Credit Suisse’s analysis of the wider pharma sector underscores the company’s “poor R&D productivity” and hence the need to boost the pipeline.

Given boss Emma Walmsley’s stated Consumer dividend goals, the Pharma business would need to payout 84% of earnings to maintain the 80p dividend, the analysts said.

“This is not optimal given the need to rebuild pipeline.”

As a result, they forecast a cut in the 2022 group dividend to 50p “to reflect what we see as more sustainable dividend payout”.

In a wider note on big pharma, the Swiss bank said GSK’s big(ger) rival AstraZeneca PLC (LON:AZN) scored the highest overall ‘strategic score’ in its PharmaValues 2021 analysis, with Bayer and Novo Nordisk scoring the lowest.

This report also saw target prices for the sector adjusted to reflect the recent movements in European stock markets “and the apparent derating of EU Pharma relative to the European markets” and the less favourable view of the sector entering 2021 by the bank’s global equity strategy team.

This resulted in the price target for AZN cut to 9,000p from 9,500p, versus the previous close of 7,722p.

Elsewhere, analysts at Jefferies cut their target for Astra to 8,250p from 8,500p and kept their ‘hold’ rating, while trimming the target price for GSK to 1,950p from 2,000p and reiterating their ‘buy’ recommendation.

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