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.
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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.
