GSK share price falls on dividend cut warning. Here’s what I’d do now

Roland Head explains why he’s disappointed by the latest results from this pharma giant but is still tempted by the GSK share price.

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.

Shares in GlaxoSmithKline (LSE: GSK) are falling. As I write, the GSK share price is down nearly 5% at around 1,300p. This sell-off came after the company warned shareholders to expect a dividend cut in 2022.

The news appears to have surprised the market. As a shareholder, I’m a little surprised too. I’ve been taking a look at Glaxo’s 2020 results and reviewing my position on this firm. Should I buy, sell, or hold Glaxo shares after this disappointing news?

What’s happened?

2020 was a mixed year for GSK, in my view. Although the group’s pre-tax profit rose by 12% to £7bn, much of this rise was due to a one-off gain from the sale of Horlicks. Excluding this, Glaxo’s sales for the year rose by just 1% to £34bn.

The good news is that sales of the firm’s newer products appear to be growing well. In pharmaceuticals, revenue from new products rose by 11% to £9.7bn. This included a 22% increase in sales of respiratory products.

Despite this growth, Glaxo’s total pharmaceutical revenue fell by 3% to £17bn last year, thanks to a 16% slump in sales of older products. Some of these have lost patent protection and are now being undercut by cheaper generic alternatives.

It was a similar story in vaccines, where rising sales of newer products were offset by lower sales elsewhere, as the pandemic disrupted immunisation programmes.

It’s a mixed bag, but I don’t think there are many surprises here. In my view, GSK’s share price is falling for other reasons.

A tough outlook

I can see two pieces of bad news in today’s results. The first is that 2021 profits are now expected to fall by 5%-9%. This compares to previous City forecasts I’ve seen for a fall of around 1%. In part, this appears to be due to Covid-19, which has hit sales of vaccines — Glaxo’s most profitable business.

The second problem is that, as mentioned, the company expects to cut the dividend in 2022.

I’ve been aware for some time that Glaxo’s dividend was probably a little stretched. One warning sign was that the payout has been flat since 2014. Long periods without growth are often a sign that a company’s dividend is not really affordable, in my experience.

However, Glaxo’s net debt fell by 20% to £20bn last year and the group’s cash generation has been improving. For these reasons, I thought CEO Emma Walmsley would be able to avoid a cut. My mistake.

GSK share price: my verdict

I’m optimistic about the medium-term outlook for this business. Glaxo appears to have some promising new products coming through. I also think the planned separation of the consumer healthcare business in 2022 will help boost growth, by creating two smaller, more focused businesses.

Even the dividend cut could turn out to be a positive, in my view. It should free up cash for new growth opportunities, supporting longer-term returns.

Ahead of today’s news, I had been planning to buy more Glaxo shares. On balance, I may still buy. At a share price of around 1,300p, GSK offers a 6% dividend yield for 2021. Although next year’s cut increases doubts about the group’s return to growth, I’m still comfortable with the long-term prospects for the business.

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. 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

How much would I need to invest in income shares to earn £300 a month?

What kind of lump sum would be required to earn £300 a month by taking advantage of some of the…

Read more »

Investing For Beginners

Up 31% in a month, could this FTSE 250 stock be getting bought out?

Jon Smith takes a look at speculation that's pushing the share price of a FTSE 250 share higher and considers…

Read more »

Investing Articles

Here’s how I’d follow Warren Buffett to start building passive income in 2025

Ben McPoland highlights one FTSE 250 firm with a strong competitive edge that he thinks can continue rewarding investors with…

Read more »

Investing Articles

Burberry shares: undervalued FTSE gems that are ready to rocket?

Burberry shares soared at the beginning of the week as the takeover rumour mill went into overdrive. Is Paul Summers…

Read more »

US Stock

Here are the latest share price forecasts for S&P 500 giant Amazon

Amazon has generated monster gains for investors over the last decade. And Wall Street analysts believe the S&P 500 stock…

Read more »

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

2 high-yield FTSE 250 shares I’d buy today — and 1 that I’d avoid

UK markets have felt some volatility after last week’s Budget and the FTSE 250 was no stranger to it. Our…

Read more »

Investing Articles

3 reasons the Rolls-Royce share price could soar over the next decade

Sustainable aviation fuel, narrow-body aircraft, and small nuclear reactors could all keep the Rolls-Royce share price climbing over the next…

Read more »

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »