GSK (LSE: GSK) shares haven’t done much since it spun off its consumer healthcare business Haleon last July. I see this as an opportunity to buy the FTSE 100 pharmaceutical stock at an attractive price, then hold on for the recovery.
In its halcyon days as GlaxoSmithKline, this was arguably the most popular dividend stock on the entire index, reliably yielding 5% or 6% a year. It lost that mantle as CEO Emma Walmsley froze the dividend at 80p for years, diverting the company’s cash into R&D rather than shareholders’ pockets. The Glaxo share price drifted lower, and income investors drifted away.
I’m after income and growth
GSK reported a positive 2022 with sales up 19% to £29.3bn, while generating free cash flow of £3.3bn. Last month’s Q1 profits and revenues also beat expectations at £7bn and £2.1bn respectively, boosted by successful shingles and meningitis treatments.
Yet the share price remains sluggish. It’s up just 2.16% over the last three months. Over one year, it’s down 16.12% to 1,475p per share. That compares to growth of 4.17% across the FTSE 100 as a whole.
If I had invested £5,000 in GSK shares one year ago, as I was tempted to do, I would have just £4,194 today, a loss of £806.
In practice, I would have slightly more, thanks to the dividend. A year ago, £5k would have bought around 272 shares at 1,839p each. The 2022 dividend of 44p per share would be worth around £120, lifting my stake to £4,314. I’d still be down £686 though.
So what does the future hold and should I invest £5,000 in GSK today?
Walmsley has been holding out the promise of a steadily flowing drugs pipeline for some years now, but there are signs she will finally deliver. At last count, the firm had 69 vaccines and speciality medicines in various states of progress.
Getting drugs approved is a long and uncertain process, and no doubt there will be plenty of slips and setbacks along the way. If the pipeline doesn’t flow as hoped, the GSK share price may continue to underwhelm.
I’m in it for the long term
As a private investor, it’s impossible for me to have a clear view of GSK’s chances of success, but I have one thing in my favour. Time.
I would only buy a stock like this with a five- or 10-year view, which should give plenty of scope for its raft of treatments to build.
In the interim, there’s the dividend. Currently, the yield is disappointing at 3%, below the FTSE 100 average of 3.5%. Yet it’s covered 3.2 times by earnings, giving scope for progression. Better still, it’s forecast to hit 3.8% this year, and should still be covered 2.6 times. With luck, it should climb higher over time, although, as ever with dividends, there are no guarantees.
GSK’s operating margins are forecast to climb from 21.9% to 28.5%, while management predicts adjusted operating profit will rise between 10% and 12%.
I don’t directly hold any pharmaceutical stocks, and would like to change that. Today’s low valuation of 10.5 times earnings looks like a good entry point. Hopefully, GSK will begin to deliver more growth and income than it did over the last 12 months.
