Investing in these troubled times seems to be about looking for top recovery stocks that are oversold in the Covid-19 crisis. Or, fearing a second dip in the 2020 stock market crash, seeking defensive holdings. I place GlaxoSmithKline (LSE: GSK) firmly in the second category, even though the GSK share price is down 11% so far in 2020.
Some investors might be buying GlaxoSmithKline shares for the hope of profits arising from Covid-19 research. But I think that would be a mistake. A number of the world’s big pharma companies have pledged to provide any vaccines they might come up with on a no-profit basis. So if that’s your target, I’d suggest going for one of the smaller biotech firms instead. Like Synairgen, whose share price has five-bagged in the past month. I really can’t see the GSK share price doing that.
We did have news of GSK’s vaccine research on Wednesday. It related to a vaccine candidate and its potential supply to the UK government. It uses “Sanofi’s recombinant protein-based technology combined with GSK’s pandemic adjuvant system“.
I think I, partly, understand what that means. But the crucial information comes in two parts. One is that the companies have agreed to supply up to 60 million doses in the UK. The other is that “Both companies are committed to making their COVID-19 vaccine candidate affordable and available globally“.
GSK share price dip
If you’re after profits from GlaxoSmithKline, I suggest you look to the firm’s wider drugs portfolio and its long-term profitability. We had news on that score Wednesday too, with mixed results over the first and second quarters of the year. Q2 saw a 3% drop in turnover (at constant exchange rates), leading to a 21% fall in adjusted operating profit. Looking to the whole of the first half, we see an 8% rise in turnover and a 2% upwards blip in adjusted operating profit. The GSK share price dipped a couple of percent on the day.
But, I’m really not too interested in quarter-by-quarter results. My attention is always on a drugs company’s development pipeline, which is where long-term profits come from. The company spoke of “continued strengthening of the biopharma pipeline which now contains 35 medicines and 15 vaccines; over 75% of pipeline assets are focused on immunology“.
As well as immunology, GlaxoSmithKline is big in HIV, oncology, and respiratory research. In short, it has its portfolio spread across the bulk of ailments afflicting the world’s increasingly affluent inhabitants.
Valuation
On the current GSK share price, we’re looking at forecast P/E multiples of 13 to 13.5. For a company with predicted dividend yields of around 5%, I’d consider that good value. And for a firm with the long-term defensive nature of GlaxoSmithKline, I rate it as a strong buy.
The dividend has been flat for a number of years now as GSK has pursued its development pipeline turnaround. But I see it as safe, and I’d be perfectly happy with the current yield until we see a resumption of earnings growth.