Pharmaceuticals giant GlaxoSmithKline (LSE:GSK) shares have had a rocky ride over the last 12 months, down 25% from their April 2020 prices. The share price was decimated by the pandemic and had been falling until late February 2021. However, recent news of hedge fund investment has sparked optimism among investors, driving the share price back up to over 1,300p in the last two months. So, is now the right time to invest?
Activist Investment
The main reason behind the partial recovery for GlaxoSmithKline shares is that activist hedge fund Elliott Management has opened an undisclosed stake in the firm. An activist hedge fund is an investing style that seeks to put pressure on a firm’s management to increase the value of the company, therefore increasing the value of their investment.
GlaxoSmithKline is a prime target for such investment. It has a well-established name, business plan, and manufacturing network. However, its share price has been prone to large fluctuations as the firm has struggled with debt problems for several years, with liabilities largely outweighing receivables. I believe Elliott could really capitalise on helping Glaxo to streamline its current assets, adding big value for investors, and hopefully stabilising the share price for the future.
Though the exact figure for the investment is undisclosed, it’s estimated to be in the billions. An investment of this magnitude signifies Elliott believes it can make some serious money with Glaxo. And the only way it will do this is if it can make the share price rise, which is good news for investors.Â
Bear case for GlaxoSmithKline shares
2020 was a year defined by the pandemic. Many pharmaceutical shares skyrocketed as a product of vaccination development. However, GlaxoSmithKline confirmed in February 2021 that it would not be continuing its own Covid-19 vaccination development. The firm has announced it will assist in the manufacturing of 60m Novovax vaccines. Yet GlaxoSmithKline shares are still trading below their March 2020 low. This is discouraging considering the recoveries that many other pharma stocks like Moderna and AstraZeneca have made since their March 2020 lows.Â
Another consideration for investors is how the company’s plan to split may affect dividend payments. It’s separating its BioPharma and Consumer Healthcare businesses in 2022. GlaxoSmithKline currently pays a dividend of 5.9%, double the FTSE 100 average. However, it has signaled in the past that the combined yield from the two businesses may not add up to the current yield. This reduces GlaxoSmithKline’s viability as a solid income share.
What’s next for GSK
An activist hedge fund like Elliott seems to have been a lifeline for GlaxoSmithKline in recent weeks. It could really galvanise Glaxo to drive faster growth. However, the lack of an owned coronavirus vaccine and the split of the firm into two entities is unlikely to help share prices any time soon.
Yet I’m optimistic for the future. I think the current GSK share price does represent a great opportunity to get a hold of cheap shares. I think Elliott’s involvement could really shake things up and push share prices higher in the future. All risks considered, I like the look of this cheap FTSE 100 share for my portfolio.