Tempted by the GSK share price? Here are 3 things you should know

Coronavirus vaccine hopes have boosted pharma stocks this year. Roland Head explains why he thinks GSK’s share price deserves a buy rating.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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 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.

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

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head owns shares of GlaxoSmithKline. The Motley Fool UK has recommended GlaxoSmithKline and Hikma Pharmaceuticals. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Great dividend stocks! Here’s the forecast for Associated British Food shares to 2027

Associated British Foods' shares have dropped in value this year. Does this present a dip-buying opportunity for dividend investors to…

Read more »

Investing Articles

Should I sell my FTSE All-Share index fund and buy a S&P 500 tracker instead?

Harvey Jones is wondering whether now is a good time to invest more money in the S&P 500, after a…

Read more »

Investing Articles

Should I buy dirt-cheap BT shares after the recent pullback?

BT shares were on the up but now they're sliding again after the board trimmed full-year guidance. Now Harvey Jones…

Read more »

Investing Articles

Up 28%, can the easyJet share price keep rising?

The easyJet share price has gained altitude over one year but plunged over five. Is now an attractive time for…

Read more »

British Isles on nautical map
Investing Articles

Should I buy more BAE Systems shares at 1,350p?

BAE Systems shares have had a fantastic run since early 2022, yet still don't appear overvalued. Is it now time…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

7% yield and a cheap valuation! Is this one of the best shares to buy this month?

Christopher Ruane has been looking for cheap shares to buy. This one has a 7% dividend yield, so is it…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

Should I buy National Grid shares for the big dividend before it’s too late?

This year's price weakness has left National Grid shares on what looks like a tempting valuation. I hope it doesn't…

Read more »

Investing Articles

There are now 5,000 ISA millionaires! See the surprising UK dividend shares they’re buying

The number of ISA millionaires is growing all the time and guess what? They're really into blue-chip dividend shares listed…

Read more »