GlaxoSmithKline (LSE: GSK) shares have not had the best run over the last year. Trading above 1,700p in late June, the share price fell below 1,250p in early February. However, in the last two weeks or so, sentiment towards the FTSE 100 company looks to have improved dramatically, with the shares suddenly bouncing over 10%. While the stock is still 18% off its 52-week high, over the last month, it has outperformed the FTSE All Share index by 8%. So what has happened that has impacted sentiment towards Glaxo, and is now the time to buy?
Dividend concerns
Over the last year, many investors have been concerned about a potential acquisition of Pfizer’s consumer healthcare unit. An acquisition of this size would have put pressure on GlaxoSmithKline’s ability to maintain its dividend. When quizzed on the prospects for the dividend late last year, GSK CEO Emma Walmsley was reluctant to give much away, doing little to ease investors’ nerves. With dividend cover looking thin in recent years, it’s not surprising that some investors have moved away from Glaxo in the pursuit of more sustainable dividends.
Novartis deal
However, on 23 March, Glaxo announced that it had withdrawn its interest in Pfizer’s consumer healthcare business, with Walmsley stating that any potential deals must not compromise the group’s priorities for capital allocation. Then, just four days later, GSK announced that it had reached an agreement with Novartis for the buyout of its 36.5% stake in their consumer healthcare joint venture for $13bn.
The market was happy with this news. The transaction is expected to make a positive contribution to adjusted earnings this year and thereafter, strengthen operational cash flows, and boost operating margins to ‘mid-20s’ by 2022. Walmsley commented: “For the Group, the transaction is expected to benefit adjusted earnings and cash flows, helping us accelerate efforts to improve performance. Most importantly it also removes uncertainty and allows us to plan use of our capital for other priorities, especially pharmaceuticals R&D.”
Is now the time to buy?
With the uncertainty over a potential Pfizer deal removed, the investment case for GlaxoSmithKline certainty looks a lot more interesting, in my view. The new deal appears to make sense for the company, even if the extra debt associated with the acquisition does add an element of risk. The company has advised that it will launch a strategic review of its consumer nutrition products, including Horlicks, to support the funding of the transaction.
With earnings predicted to hit 106.8p per share this year, Glaxo currently trades on a forward-looking P/E ratio of 13.3. This is below the FTSE 100 average forward P/E of 14. Furthermore, as my colleague Rupert Hargreaves noted at the weekend, GSK’s valuation is significantly below that of US peers such as Johnson & Johnson, Merck & Co Inc, Bristol-Myers Squibb Co and Eli Lilly and Co, which together trade at an average forward P/E of 15.7.
GSK’s dividend yield also looks attractive at present, even if no growth is to be expected in the short term. The company advised in February that shareholders can continue to expect a payout of 80p per share this year, which equates to a yield of 5.6% at the current share price.
Weighing up these factors and with the Pfizer uncertainty removed, I believe that now could be a good time to take a closer look at the stock.
