Why I think the GSK share price could keep rising in 2020

The GlaxoSmithKline plc (LON: GSK) share price has hit an 18-year high. Roland Head remains bullish.

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.

2019 has been a good year for GlaxoSmithKline (LSE: GSK) shareholders. As I write, the Glaxo share price is trading at more than 1,800p. That’s 20% higher than at the start of the year.

Chief executive Emma Walmsley has avoided a dividend cut and is rolling out a bold strategic plan to split the company in two. I’ll discuss this more in a moment, but my view is that this plan will cut debt and reward patient shareholders, including me.

In this article I want to explain why I think GlaxoSmithKline shares could keep rising in 2020.

Bold plans

When Walmsley took up the CEO post in 2017, early indications were that she might leave Glaxo’s conglomerate structure untouched. The group’s mix of consumer healthcare and pharmaceuticals has divided investors, with some – notably Neil Woodford – calling for the company to be split.

With hindsight, it now looks as though Walmsley was simply getting her ducks in a row before making a bold move. Rather than simply cutting the company in two, she’s brokered a series of deals that should strengthen both sides of the business before a planned split by 2022.

Getting ready for the split

On the pharma side, this year’s $5.1bn acquisition of oncology specialist Tesaro is expected to contribute to the development of a number of new cancer treatments. GSK is also reporting strong growth in vaccines, with sales of its shingles treatment Shingrix up 87% to £535m during the third quarter.

The group has always had a strong presence in the consumer healthcare market, with products such as Sensodyne and Panadol. But rather than spinning out this business on its own, Walmsley agreed to a joint venture with US pharma giant Pfizer. The two companies have merged their consumer healthcare operations to create a business with market-leading scale.

Consumer healthcare products generally carry attractive profit margins and enjoy stable demand. This generates reliable cash flows. This is expected to allow the new company to take on a big chunk of Glaxo’s £28bn net debt, giving the pharma firm flexibility to invest in its pipeline of new products.

Work is underway to integrate the two consumer businesses. Cost savings of £500m per year are expected by 2022. At this point, Glaxo plans to spin out the new company into a UK stock market listing.

Why I’m a buyer

GlaxoSmithKline shares currently trade on about 15 times forecast earnings, with a dividend yield of 4.5%.

That looks pretty cheap compared to sector rival AstraZeneca, whose shares currently trade on a multiple of 23 times 2020 forecast earnings.

There’s a simple reason for this. After four years of falling profits, AstraZeneca appears poised to return to growth. Analysts expect underlying profit to rise by about 20% next year. In contrast, Glaxo’s earnings are expected to be broadly unchanged in 2020.

In my view, this short-term outlook makes Glaxo the more attractive buy. A lot of growth is already priced into AstraZeneca shares. Any disappointment could hurt. In contrast, Glaxo remains more modestly valued despite this year’s gains. If performance continues to improve, I can see decent upside potential.

I think GSK’s long-suffering shareholders should remain patient. I remain a long-term buyer and will be looking to pick up more shares on any market dips.

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 owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. 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

Snowing on Jubilee Gardens in London at dusk
Investing Articles

Could December be a great month to buy UK shares?

Christopher Ruane sees some possible reasons to look for shares to buy in December -- but he'll be using the…

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

Sticking to FTSE shares, I’d still aim for a £1,000 monthly passive income like this!

By investing in blue-chip FTSE shares with proven business models, our writer hopes he can build sizeable passive income streams…

Read more »

Growth Shares

BT shares? I think there are much better UK stocks for the long term

Over the long term, many UK stocks have performed much better than BT. Here’s a look at two companies that…

Read more »

British Pennies on a Pound Note
Investing Articles

After a 540% rise, could this penny share keep going?

This penny share has seen mixed fortunes in recent years. Our writer looks ahead to some potentially exciting developments in…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

Is the S&P 500 going to 10,000 by 2030? This expert thinks so

One stock market strategist sees animal spirits taking hold and driving the S&P 500 index even higher by the end…

Read more »

Investing Articles

I’m expecting my Phoenix Group shares to give me a total return of 25% in 2025!

Phoenix Group shares have had a difficult few months but that doesn't worry Harvey Jones. He loves their 10%+ yield…

Read more »

Hand of person putting wood cube block with word VALUE on wooden table
Investing Articles

14.5bn reasons why I think the Legal & General share price is at least 11% undervalued

According to our writer, the Legal & General share price doesn’t appear to reflect the underlying profitability of the business. 

Read more »

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »