Was Woodford right to sell Glaxo?

Neil Woodford strides across the equity income landscape like a colossus, gazing down upon his competitors as they scurry about like ants in the dust.

Okay, perhaps that’s taking it a bit too far, but Neil Woodford is without a doubt the UK’s best know income-focused fund manager.

And one of his largest and best-known holdings for the last 15 years has been GlaxoSmithKline, the pharmaceutical and consumer goods giant which is also a household name.

But now these two giants have parted ways, with Woodford announcing recently that Glaxo was no longer a holding in his portfolio.

However, Woodford’s sale of Glaxo was only a partial exit from the pharmaceutical industry. AstraZeneca, another Big Pharma company, continues to be Woodford’s largest holding, taking up more than 8% of his main fund.

I thought it was interesting that he decided to sell Glaxo but keep AstraZeneca, so I decided to have a look at both companies in this month’s Master Investor magazine.

Was he right to sell Glaxo? Should he have sold AstraZeneca instead? And, since I hold both companies in my model portfolio and personal portfolio, should I (and other dividend investors like me) follow Woodford, or not?

Woodford Glaxo 2017 07
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Was Woodford right to sell Glaxo and hold AstraZeneca?

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

8 thoughts on “Was Woodford right to sell Glaxo?”

  1. I agree that both these stocks are looking a bit shaky, but where else can one find these yields? It seems only in consumer cyclicals or outside the UK market.

    1. Hi Andrew, unfortunately it seems that these days high yields almost always come with high risks. There are reasonable looking high yield stocks out there, but not many.

      For example, there are just 17 stocks on my stock screen that have yields above 4% and no obvious problems (like very low growth or high debts). That’s 17 out of a screen covering over 200 companies, which itself is a subset of the 600 or so stocks in the FTSE All-Share.

      So the quality high yield pond is definitely shrinking.

      And yes, high yield stocks are typically cyclical stocks at the moment. Only three of those 17 high yield stocks are from defensive sectors.

      I guess you either have to accept lower yields, or more concentration in UK cyclicals, or look to non-UK markets.

  2. Enjoyed the article John. Having read about both these businesses on a few value investing blogs originating from the UK it was neat to see your current perspective in more detail. I bought a copy of the Defensive Value Investor btw and have finished the e-book already (I’ll wait for the hardcopy to arrive and see how I can best use it as a guide along with my own approach). Genuinely it is one of the best rundowns I’ve read on ‘how-to’ analyse a company in a thorough going way, and very enjoyable read.

    1. Thanks WFT, I’m glad you enjoyed the book.

      Hopefully the publisher has some local printing capability in Australia, otherwise you could be waiting a while for the book to arrive!


  3. “”””Neil Woodford strides across the equity income landscape like a colossus, gazing down upon his competitors as they scurry about like ants in the dust.”””

    John, I haven’t read the article yet – that’s next, but I couldn’t resist asking if you are reading Robert Harris’s books on ancient Rome, because it looks like your opening phrase is based on his masterful literature – lol

    OK off to read it – back soon – LR

    1. Hi LR, no I’m not cultured enough to read books about ancient Rome!

      And my blog posts are definitely not masterful literature, so I guess it must be blind coincidence, like the chimpanzee who writes Romeo and Juliet.

  4. John — Just read the article a couple of times and it’s interesting how you position the two as fair value. I think I’ve been very lucky and had held both these companies through fairly hefty stock rises. I think I held them to some extent in a period of relative ignorance (we are all ignorant I suppose but in different areas). I had historically never understood just how risky both these companies are in reality until the last 3-6 months.

    I sold Astra at a handsome price and will not buy it back – possibly at any price. The financial position that the CEO has left the company in is extraordinary and unsafe in my view. He looks like he’s just about to jump ship and you have to wonder why that is — unfortunately for existing holders the share price has already fallen back to 49XX, and I think you will see a much lower price when his departure is actually confirmed by the company, and a devastatingly low price if the new drugs fail.

    Couple of general comments (4 in fact), and somewhat supported by a good friend of mine who was the VP research for Pfizer some time back :-
    1. 1 in 5000 research attempts end in a successful (commercially successful) marketable drug that passes via the FDA. – You might get better odds at Ladbrokes maybe?
    2. There are no longer any “blockbuster drugs” — the drugs manufactured today satisfy smaller numbers of users and the costs of development are more difficult to absorb and the problems are much harder to solve. Charging higher prices for these drugs has been the attempted solution, but with stretched healthcare budgets and heavy political resistance this is turning out to be an untenable solution.
    3. Development costs have gone exponential – what was once a $100 million program is now $500million to $1billion.
    4. The companies are consistently avoiding reality in their reported accounts — using underlying as a way to present only the information that flatters their activity and recording exceptionals for items that are a general run of the mill annual business activity. The net effect of that is the real P/E’s are significantly higher than reported.

    In GSK’s case, there is another very big risk apart from the loss of it’s big pharma drug Advair, and that’s the new threat to the ViiV division from Gilead. ViiV is the most profitable part of GSK and it’s under threat. Gilead’s delayed drug introduction will eventually impact GSK’s share and put pressure on margins in that division.

    I may turn out to be wrong, but I’ve taken my fairly hefty profits and can breath a while while I find a safer and better company(s) with growth, modest debt, no pension horrors and a strong competitive position. I believe I have a few, but a few more would help reallocate the spoils so to speak.

    I was also alarmed by this article written by Terry Smith and his team highlighting the hidden risks in these stocks and also took note of the sale by Warren Buffet of GSK a couple of years back at prices above today’s 1611.
    Here is the 2015 article by Terry Smith :-

    If I may add a company worth a look and I haven’t decided on this yet is Alliance Pharma which has a very modest rating, yes it has some debt, low capital expense requirements, has been quite acquisitive but seems to absorb each one very well over the years. — OK there I’ve said it – have you happened to scan over this one by any chance John?


    1. Hi LR, you’ve made some good points there. For me these companies are like companies that have long-term service contracts, like Carillion. They rely on big one-off wins to drive profits over many years, and if they don’t get those wins, or if they spend too much to get the contract or drug patent, then they can lock in weak or negative profits for years.

      The answer is to keep financial obligations to a minimum, but of course the temptation is to load up on debt to fuel growth or pave over the cracks.

      On the other hand, if things work out well for Astra’s pipeline it could skyrocket from here, but really it’s like pinning the tail on the donkey. The uncertainty is huge and I’m not surprised the CEO may be heading for the exit while the going is good.

      As for Alliance Pharma, it’s an AIM stock and I only look at FTSE 100/250/small cap stocks, and in fact I’ve never even heard of it. So I can’t help you there I’m afraid!

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