FTSE 100 giant GlaxoSmithKline (LSE: GSK) was the most popular buy on investment platform Hargreaves Lansdown last week. Today, I’m asking whether I should be joining other investors in adding GSK shares to my own portfolio.
GSK shares: FTSE 100 laggard
Based purely on the performance of its share price over the last five years, it’s tempting to give GlaxoSmithKline a ‘hard pass’. GSK’s value is now 10% lower than it was in April 2016. It’s also been one of the worst shares to own in the FTSE 100 over the last year.
Considering the recovery seen in markets since the 2020 crash — not to mention Glaxo’s status as the biggest producer of vaccines in the world — this is quite some ‘achievement’. Then again, the fact that the company hasn’t come up with a Covid-19 vaccine so far hasn’t gone down well. It also helps to explain why shares in peer Astrazeneca have soared.
On top of this, there’s a distinct possibility that GSK will be forced to reduce its dividend payouts going forward to free up cash to invest in its drug development pipeline. This makes complete sense, but it’s not what those who own the shares for their dependable income want to hear. In fact, it underlines the point that no investment is ever devoid of risk.
So, why are Hargreaves Lansdown investors suddenly interested?
Activists assemble
It all seems to be down to recent news that activist investor Elliott Management has declared a multi-billion pound stake in GSK. Activist investors tend to get the market excited because they can be a catalyst for change at a flagging company.
US-based hedge fund Elliott certainly has form when it comes to ruffling feathers. It previously pushed for change at Premier Inn owner Whitbread and had a few bruising encounters with FTSE 100 miner BHP Group.
Of course, whether its involvement leads to a seismic change of strategy remains to be seen. It certainly comes at an interesting time given GSK’s plan to list its consumer healthcare business as a separate entity next year. There’s always a chance that its involvement could make things worse.
Regardless, I think there are reasons to be positive about GSK shares.
Defensive play
For one, demand for Glaxo’s products, such as the highly successful shingles jab Shingrix, should recover once the pandemic has passed. A host of new launches are also expected over the next five years.
In addition, there’s a lot to be said for buying highly defensive shares now. With markets around the world looking frothy once again, any wobbles will likely be felt most in hyped growth plays, not stock-for-all-seasons Glaxo. Even if markets were to continue rising, it’s quite possible that companies offering value will be the ones to thrive.
Moreover, I think those dividends are worth grabbing. A likely 80p per share return for 2021 gives a yield of 6%. If the payout is reduced by 20% in 2022 (the consensus forecast), the subsequent 4.8% yield is still very decent.
And then there’s the price. At 13 times forecast FY21 earnings, I think Glaxo offers great value.
Bottom line
GSK shares have been in the doldrums for a long time and perhaps justifiably so. It remains a contrarian bet for now.
Notwithstanding this, I’d be comfortable buying GSK shares at today’s price. As with investing in general, patience is key.
