The GlaxoSmithKline (LSE: GSK) share price has been one of the FTSE 100’s worst-performers over the past year.
Including dividends paid to investors, the stock has returned -13.5% over the past 12 months. Over the same time frame, the FTSE All-Share has added 28.6%. That means shares in the pharmaceutical giant have underperformed by 42% since the end of April last year.
This has changed over the past two months. Since the beginning of March, the stock has returned 13%. The GlaxoSmithKline share price has been boosted by the revelation that giant activist hedge fund Elliott Management has taken a stake in the business.
As of yet, we don’t know Elliott’s intentions, but I think we’ll soon find out.
This firm can be incredibly aggressive. In 2012 it seized an Argentine Navy vessel crewed by more than 200 sailors when it was in Ghana as part of a 15-year battle over unpaid debts. The hedge fund ultimately received a payout of $2.4bn on the debt, multiplying its investment four times.
While Elliott can be aggressive, it also has an excellent track record of improving company performance and achieving positive outcomes for shareholders.
Shock attack
The very fact that the hedge fund has become involved could be enough to shock Glaxo into action. Over the past few years, the company’s spending on research and development has dwindled. This lack of expenditure has hurt its drug pipeline. The organisation now has fewer drugs under development than significant peers such as AstraZeneca.
Glaxo is also trying to spin off its consumer healthcare business. The decision to spin off this division was initially met with praise in the City. However, this split is taking longer and costing more than expected.
The one redeeming feature of the GlaxoSmithKline share price over the past few years has been its dividend yield. At the time of writing, the stock supports a dividend yield of 5.9%. That’s nearly double the FTSE 100 average.
Unfortunately, this payout is on shaky ground. It does not make much sense for the company to scrimp on research and development spending while returning so much cash to investors. Management has already warned that the dividend may be cut after the business is split.
The group’s debt is also expanding. It has risen to £21bn, more than double the level reported five years ago.
GlaxoSmithKline share price risks
All in all, there are a lot of risks overhanging GlaxoSmithKline shares, and the business faces plenty of challenges as well.
However, I believe that the fundamentals of the firm are solid. As such, I would buy the stock today. I think Glaxo’s fundamentals are sound, but the company is struggling for direction. Elliott could help drive it down the right path.
Of course, the hedge fund’s involvement does not guarantee that Glaxo will produce market-beating returns. The company could try to fight its new shareholder, which may end up being a costly battle with no winner. Therefore, I would only buy a starter position for my portfolio. I’d want to see each party’s battle plan before taking a full position.
