GlaxoSmithKline (LSE:GSK) is a British pharmaceutical company with a global presence. It’s a long-established business with many well-known brands and products in its portfolio. But its share price has slipped in recent years, yet change is afoot, and now an activist investor appears to have taken an interest. In response, the GSK share price has been rising. So is this FTSE 100 stock a good investment?
The GSK share price is prone to fluctuations
The share price has endured many peaks and troughs over the past 20 years. It spiked above £18 a share in late 2019 but is now languishing around £13.50. For some long-term investors it has been a solid stock pick and great dividend payer. But not for all.
In February 2020, the company announced it planned to de-merge into two businesses. One focusing on pharmaceuticals and one on consumer health. When this happens next year, we expect the dividend payment to be cut. This is disappointing for long-term holders, especially those who bought in at the highs and have seen no capital growth.
GSK was the first share I ever bought and back then it was priced a fair bit higher than it is today. So, I’m one of those. But I think there’s a lot to like about GSK, and that’s why I’m keeping it in my Stocks and Shares ISA.
Profitable and cash flow positive
Based on earnings per share of 93.9p, the current price-to-earnings ratio is 14, which is well below the industry average. Many pharma stocks understandably shot skyward in 2020 in the race to find a Covid-19 vaccine. This didn’t do a great deal for GSK, which is now trading below its March 2020 low. Nevertheless, this lack of attention may mean it’s a long-term value play.
Today the GSK dividend yield is around 5.9%. This is certainly enticing for a long-term portfolio. And its free cash flow came in at a solid £5.4bn in 2020.
It has 20 products in late-stage clinical trials and over 20 new product launches planned in the next five years, with at least half of them expected to bring in over $1bn a year.
GlaxoSmithKline has not yet come up with a marketable Covid-19 vaccine. Given that it’s the world’s biggest vaccine company, this is surprising. It’s been developing one with French company Sanofi, but that’s been delayed until later this year. Yet, there’s still hope on the horizon as it recently struck a £132m (€150m) deal with Germany’s CureVac to develop one-shot vaccines for Covid-19 variants. We expect these to roll out next year.
Risks to GlaxoSmithKline shareholders
Despite the many good points, the group expects profits to decline this year as it invests heavily in R&D.
GSK also has considerable debt, and some shareholders are voicing their concerns over the way the company is being run. The GSK share price has declined under the current CEO, Emma Walmsley. That’s why the response to activist investor interest is positive. Last week, an FT report claimed activist hedge fund Elliott Management has accumulated a multibillion-pound stake in GSK. This fund is credited with helping Whitbread and BHP turn their fortunes around in previous years. So, investors are hopeful it may help steer the company in a more profitable direction.
Whether GSK is undervalued really depends on its future profitability and the direction the company takes after the split.