Tempted by the GSK share price? Here are 3 things you should know
The Motley Fool
Published Jul 22, 2020 07:31
Tempted by the GSK share price? Here are 3 things you should know
As a shareholder, I admit the GlaxoSmithKline (LSE: GSK) share price hasn’t been a dazzling performer in recent years. But if you’d held Glaxo shares for the last 10 years and reinvested the dividends, you’d have doubled your money.
In my view, chief executive Emma Walmsley is doing the right things to move the business forward. I expect this FTSE 100 stock to continue to provide attractive income and capital gains for patient investors. Indeed, I’m hoping to buy more shares in the near future. Here are three reasons why I rate GSK as a buy.
1. Taking the long view on coronavirus Many pharma stocks have rocketed this year, due to hopes they’ll be the first to discover a vaccine for coronavirus. GSK’s share price has lagged behind by comparison, but I don’t think investors should be too concerned.
Glaxo makes around one-third of its profits from vaccines and is a big player in this sector. The firm is involved in several collaborations to develop a vaccine for Covid-19. However, the group’s main focus is on technical solutions to help improve the effectiveness of a coronavirus vaccine, and defend against future outbreaks.
This may seem less exciting than a direct hunt for a magic bullet cure, but I suspect it’ll drive a stronger financial performance over the medium term.
2. Climbing the patent cliff We don’t hear much about the patent cliff anymore, but it’s still a real problem. Patent expiry on popular medicines tends to result in the introduction of cheap generic competitors.
A good example is Glaxo’s Advair asthma drug. FTSE 100 rival Hikma Pharmaceuticals (LON:HIK) is currently in the late stages of introducing a generic alternative. Advair has been a big seller for GSK for many years, but US sales fell by 40% during the first quarter of this year, due to generic competition.
I think GSK’s share price is under pressure because the firm hasn’t yet matched rival AstraZeneca‘s success in finding new big sellers. However, I expect the situation to gradually improve over the next few years. In the meantime, I think there’s another potential catalyst that could give Glaxo stock a boost.
3. GSK share price could rise after split GlaxoSmithKline currently has a rather unfashionable conglomerate structure. Its pharmaceutical businesses are grouped together with a consumer healthcare operation which owns brands such as Sensodyne, Panadol and Nicorette.
Consumer brands like this are attractive assets, in my view. They generate reliable cash flows from regular repeat purchases by millions of customers. But it’s a quite different business to developing pharmaceutical products, such as vaccines and cancer treatments.
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Walmsley seems to agree. Over the next couple of years, she’s planning to separate GlaxoSmithKline’s consumer business into a company listed on the London stock market. The end result should be two more tightly-focused companies, with stronger finances. I believe splitting the group should lead to a higher valuation for both sides of the business.
At current levels, GSK’s share price values the stock at 14 times forecast earnings, with a dividend yield of 4.9%. I see this as a good level to buy for a long-term position
The post Tempted by the GSK share price? Here are 3 things you should know appeared first on The Motley Fool UK.
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Motley Fool UK 2020
First published on The Motley Fool
Written By: The Motley Fool
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