Haleon (LSE: HLN) shares dropped straight into the FTSE 100 when they hit the market on 18 July. This £27bn spin-off from pharmaceutical giant GSK is the new owner of consumer healthcare brands such as Sensodyne, Voltaren, Panadol,and Theraflu.
History suggests consumers tend to stay loyal to healthcare brands in a recession, rather than trading down to cheaper options. I reckon Haleon could be a great long-term investment for my portfolio. With the stock hovering around the £3 mark, should I buy?
Why Haleon should be a cash machine
Although Haleon’s advertising focuses heavily on its scientific credentials, the reality is that this business is all about marketing and brands.
Most of Haleon’s core products have been largely unchanged for years. The company only spent £257m on research and development last year. That’s just 2.7% of its £9,545m turnover.
In comparison, I estimate that GSK’s pharmaceutical business spent around 20% of its turnover on R&D last year, excluding Haleon.
To sum up, Haleon has a portfolio of strong brands, which generate consistent sales and have low R&D costs. This is why I believe this business is a cash machine that could generate rising dividends for many years to come.
Will the share price keep falling?
Newly-listed companies are often priced quite high in my experience, so it can pay to be patient.
Haleon seems to be following this pattern, at least so far. The stock listed at 330p, but is down by 12% at 290p as I write.
Another possible reason to be cautious about buying the shares is that US pharmaceutical firm Pfizer is now planning to sell its 25% stake in Haleon.
Pfizer has promised to sell the shares in an orderly way, but it will need to find buyers for nearly £7bn of stock.
What may happen is that if big funds want to buy Haleon, they’ll buy from Pfizer rather than buying in the market. That could leave Haleon’s share price struggling for support.
Haleon shares: what I’m doing
A post-pandemic surge in cold and flu infections is expected. That would be good news for Haleon, whose portfolio includes several popular cold and flu medicines.
However, although I expect Haleon’s cash generation to be strong this year, the stock’s forecast dividend yield is just 1.1%. This figure rises to 2.1% for 2023, but that’s still pretty low.
The main reason for this low yield is that cash is required to reduce the £10bn debt pile Haleon inherited from GSK. I don’t think this will be too much of a problem, but CEO Brian McNamara expects to need three years to bring leverage down to target levels.
I think Haleon shares could offer long-term value at current levels. But in my view, the combination of the Pfizer share sale and the stock’s low dividend yield could mean that the Haleon’s share price drifts lower over the coming months.
For these reasons, I’m going to wait a little longer before deciding whether to buy.
