Shares in GlaxoSmithKline (LSE: GSK) have risen about 8% so far this month. That might not sound dramatic, but they started the month close to their year low, so a move upwards is welcome. Even now, the GSK share price is down almost 10% over the past 12 months.
Here I’ll look at what I think is causing the share price movement and what I plan to do now for my own portfolio.
Some good news
One reason I think the share price has started to move up is that the company has had some good news on Covid-19 treatments. So far the company has been lagging in the vaccine race. But a report last week said the treatment it has been developing with Vir Biotechnology is highly efficacious.
Secondly, I think some shareholders feel that the sell-off in the pharma giant was simply overdone. Inflation concerns have sparked a positive rerating of many value shares. I’m not surprised that this blue chip pharma giant looks like good value to some bargain hunters. Its plan to split off its consumer business from the pharma business isn’t to everyone’s liking. But the company clearly believes it could help create more value overall.
Currently, that reasoning suggests, the company may suffer from a sort of conglomerate discount. That means the sum of the parts may be greater than the whole. In his shareholder letter this year, Warren Buffett defined a conglomerate as “a negative term applied to holding companies that own a hodge-podge of unrelated businesses”. I don’t think that quite matches GSK but its range of assets, from over-the-counter tobacco cessation products like Nicotinell to its shingles vaccine Shingrix, does indeed look challenging to manage efficiently within one organization.
Dividend maintenance
One attractive thing about the current GSK share price is it offers a dividend yield of 6%. For a FTSE 100 stalwart, I find that highly attractive.
However, the company has already indicated that the breakup will likely result in a lower total dividend. In itself I don’t think that is necessarily bad – even with a cut, the dividend yield might still be competitive.
My concern is more about dividend coverage. The company has held the dividend flat for eight years. I think that reflects an inability to grow earnings and cash flow consistently to support dividend growth.
What I’d do now about the GSK share price
I’ve been watching the GSK share price for months. I often find it tempting to try to time the markets and get in at the bottom price of a share. But in practice, getting the most attractive entry point is usually up to chance. I’d rather invest in great companies at good prices, as Buffett advises, than miss an opportunity because I am trying to save a few pence more.
However, for now I am going to keep GSK on my watchlist, but not buy.
I think it’s a good company but right now it doesn’t look like a great company to me. Its pharma portfolio and pipeline is decent but it doesn’t excite me. The breakup could release value, but equally it might not go as smoothly as hoped. It’s the world’s largest vaccine maker by revenue, but on Covid-19 vaccines it’s been beaten on speed by nimbler competitors.
