I don’t own shares in GlaxoSmithKline (LSE: GSK) or Unilever (LSE: ULVR), but my reasons for wanting to buy them have grown stronger. Actually, I do indirectly own a little of each through my holding in City of London Investment Trust, but both have now risen on my shortlist.
The two companies’ share prices moved strongly on Monday. At the time of writing, late morning, Glaxo shares are up 4% while Unilever is down 7%. But it’s not the movements that attract me. No, it’s the reason behind them.
Glaxo’s Consumer Healthcare division has never, in my view, fitted in with pharmaceuticals development. And that’s one of the things that’s held me back from buying in the past. I mean, what’s Sensodyne got to do with monoclonal antibody development? Or Eno with malaria vaccine research?
A consumer healthcare sell-off has long been in the pipeline, and Unilever has just made a bold move. The consumer products giant has offered £50bn to take the division off Glaxo’s hands. It’s apparently the third-largest takeover bid in UK stock market history, but commentators are already suggesting it could undervalue the target.
Glaxo was quick to reject the offer, saying that it “fundamentally undervalued the Consumer Healthcare business and its future prospects“. With the drugs firm reportedly valuing the division at £47bn-£48bn, Unilever did offer a pretty thin premium. But, as usual with such things, I’d say it’s likely there will be further offers. And I wonder if anyone else might want to get in on the act? It could get quite exciting if that were to happen.
Unmissable Unilever dip?
Why does the news make the two companies more attractive to me? Well, for one thing, there’s Unilever’s valuation. Sentiment seems to be against it right now, and the share price is down 16.5% over the past 12 months. Unilever’s 2021 first-half underlying earnings came in at €1.33 per share, compared to the €1.48 recorded for the full year in 2020.
To me, that suggests the 12-month fall in the Unilever share price is an anomaly, and I reckon it’s unjustified. I’ve always seen Unilever as one I’d like to buy on the dips. And the current dip is making it look like a good time for me to get in.
GlaxoSmithKline good value?
What about GlaxoSmithKline? a 20% rise in the past 12 months suggests there’s no dip to buy on here. But we’re still looking at a five-year gain of only a modest 10%. Glaxo shares are still well below their peak of January 2020. So GSK is also still on my candidates list. At the moment, though, Unilever is looking the better bargain to me.
Perhaps ironically, if I bought both Unilever and GlaxoSmithKline, and if the Consumer Healthcare bid is ultimately successful, I’d end up owning the same stuff. The only difference would be in who manages which parts. But Unilever in charge of consumer products makes a lot more sense to me.