Neil Woodford: ‘Why I sold Glaxo and bought Lloyds’



Neil Woodford, Britain’s most high-profile fund manager, has sold his entire stake in GlaxoSmithKline because of the drugs maker’s refusal to consider a break-up and his doubts about the sustainability of its dividend.

He has used the proceeds of the sale to invest in domestically focused firms such as Lloyds Banking Group, Barratt Developments, Taylor Wimpey and British Land, saying he was much more optimistic about the British economy, which was poised to benefit from “a prolonged period of economic and political stability” after the election.

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He had held shares in GlaxoSmithKline for more than 15 years and it was the third largest holding in his Woodford Equity Income fund as recently as March 31, according to Morningstar, the fund analyst.

Mr Woodford described three of the drug maker’s four divisions as “perennial underperformers” and said he was concerned about threats to the fourth, which focuses on HIV treatments.

“Over the past three years, [this division] has been responsible for more than half of Glaxo’s growth. If the company’s one remaining growth engine starts to falter, this could pose a threat to its future revenue growth, earnings and cash flows,” he said in an update to investors today.

Mr Woodford said he was also concerned about “the lack of a rich pipeline and the lack of strategic options which results from an already stretched balance sheet”.

“Together, these concerns now make me less convinced that Glaxo’s dividend is sustainable,” he added.

The star fund manager said he had tried for years to persuade the group to split itself up into more focused businesses, but to no avail.

“I have long believed that value could be created for the company’s shareholders if it split itself into separate, more specialised business units. The sum of the parts is significantly greater than the whole. My viewpoint, and that of other like-minded institutional investors, has been heard but ultimately ignored – repeatedly.”

He said the new chief executive, Emma Walmsley, who took over last month, had been “keen to portray herself as a continuity candidate” and as a result “the prospect of a Glaxo breakup now looks more remote than ever”.

“In the event of a breakup being pursued, I would have viewed a dividend cut as a tolerable consequence of such a positive outcome for shareholder value more broadly. My base assumption now, however, is that Glaxo remains a healthcare conglomerate with a sub-optimal business strategy, and shareholders face a cut to the dividend.

“These characteristics do not appeal to me as an investor. That is why I have recently sold the fund’s position in Glaxo.”

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Mr Woodford sounded a remarkably upbeat note about the British economy, saying many investors were “far too pessimistic” about the effects of the Brexit vote.

“I think the market has become too cautious about the rising inflation and about broad economic activity,” he said. “We have record levels of employment and job vacancies – and the one other very significant factor, for which I’ve been waiting for some time, is that the credit environment has begun to normalise.

“The banks are now broadly repaired in the UK. They will continue to rebuild capital. But now they are lending to the economy– it is the first time since the financial crisis that credit has flowed to the economy at an acceptable price. That’s an important new and positive dynamic for the UK economy.”

He said his optimism about the economy had led him to invest in cyclical businesses such as banks at “depressed valuations”.

“I have been buying things like house builders, some banks and other domestic cyclicals in building materials and construction. I have in the past had very big weightings in banks. In many ways this is a repeat of what the portfolio looked like in periods gone by.”

In a separate update today, Mr Woodford’s firm said: “We view Lloyds as a well-managed bank with a conservative approach to its balance sheet. Its valuation looks very attractive in our view, and it has the ability to pay a very healthy and growing level of dividend.”

Glaxo declined to comment.

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