GlaxoSmithKline (LSE:GSK) has had some positive headlines recently, adding momentum to the GSK share price growth in recent days.
The multinational FTSE 100-listed pharma has been contracted by the UK government to help manufacture 60m doses of the Novavax Covid-19 vaccine.
And yet the shares are trading 12% lower than 12 months ago. Could these be the perfect buy for my Stocks and Shares ISA when allowances reset in April?
GSK share price: bargain?
Investing themes tend to come along in waves. At one point, the stock market will be overly optimistic about the prospects of growth companies. At other times the market will be unduly pessimistic about the future fortunes of dividend payers like GSK.
The father of value investing and Warren Buffett’s mentor, Benjamin Graham, described the phenomenon like this. He wrote: “Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal.”
So is it time for me to “buy wisely” with the GSK share price having fallen sharply in the last 12 months?
Future split
The main risks on the horizon for me when I look at the GSK share price are the dividend and the planned split of the company. CEO Emma Walmsley is spearheading the division of GSK into two separate companies. One will focus on biopharma and drug development. The other will cover GSK’s consumer healthcare business.
Its biopharma division continues to pump out news at a fair old clip. This covers developments in everything from HIV drugs to asthma treatments and monoclonal antibody antiviral remedies for Covid-19. I’m not so sure about the consumer healthcare arm.
The moat is everything
I’m very much a fan of businesses with strong economic moats. When I look to buy income-producing shares for my ISA, I want to know those companies have market-leading positions. That’s so they can continue to dominate the market and produce healthy profits for years to come.
By 2026, GSK plans to double the number of market-leading ‘blockbuster’ drugs in its portfolio. To me, that means an even stronger moat. And given the company’s laundry list of trademarks and patents on its drugs, I see the GSK share price remaining fairly buoyant long term.
Higher profits also generally means a stronger chance that dividends will continue unabated.
At today’s share price around 1300p, an 80p annual dividend represents a 6.1% yield. That’s among the best of what the FTSE 100 can offer.
Analysts generally believe the GSK share price can support a 67p dividend going forward. Even at these lower levels that represents a 5.1% yield, far above the FTSE 100’s 2.3% average.
In conclusion
FY2020 results released in February 2021 showed me a resilient business that performed well during the pandemic. However, earnings per share are expected to decline in by a mid to high single digit percentage in 2021. It’s down to the cost of investing in the company’s drug pipeline. So investors could see the GSK share price fall further.
But I think a higher capex is a good trade off for improved margins.
Walmsley has hit £300m cost saving targets and with the 2022 split on track? I can believe her statement that shareholders should expect “meaningful improvement in revenues and margins“. I’m buying.
