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Why I’d buy GSK shares despite the coming dividend cut

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Owning GlaxoSmithKline (LSE: GSK) shares has been somewhat disappointing for many long-term investors. And with a dividend cut looming, some have decided it’s time to sell up.

However, despite the underwhelming past performance, I personally think the future could be a lot brighter. Indeed, I reckon now could be an opportune time for me to buy the stock. Here, I’ll explain my thinking.

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Poor performance of GSK shares

It’s a sad fact that GSK’s all-time-high share price (over £23) was as long ago as January 1999. This was almost two years before the Glaxo Wellcome/SmithKline Beecham merger that formed the platform of the group we know today. The share price hasn’t come near £23 in the 21st century. And I can currently buy the shares for little more than £14.

Returns for investors over the last five and 10 years have been inferior to the FTSE 100. On an annualised basis, 5.6% versus 7.2% (over five years) and 5.7% versus 6% (over 10 years). These returns include dividends. And as GSK’s annual payout has been stuck at 80p a share since 2014, investors who bought for income have seen their spending power nibbled away each year by inflation.

This may not seem a promising backdrop for me to buy GSK’s shares today. But as I mentioned, I think the future could be a lot brighter, despite the coming dividend cut.

GSK and GSK Consumer Healthcare shares

GSK is planning to split itself into two companies next year, and the dividend cut will accompany this. Many analysts and institutional shareholders have long felt the market is applying a ‘conglomerate discount’ to GSK. In other words, that its pharmaceuticals, vaccines and consumer healthcare businesses would be valued more highly by the market if they were standalone companies.

By buying GSK shares today, I could benefit from an uplift if the group’s demerger of its consumer healthcare business unlocks value. Of course, there’s no guarantee the aggregate value of the shares I would hold in the two companies would be higher than today’s £14. Indeed, there’s a risk it could be lower. The market could respond unfavourably when it gets more detail on the new corporate structures and dividend policies of the standalone companies.

GSK will be providing an investor update for shareholders on Wednesday (23 June). This is to outline strategy, growth outlooks (2022-2031), capital allocation priorities and timing and approach to separation.” The unveiling of its dividend plans is also on the agenda.

Dividends

GSK has already said it expects the aggregate dividend of the two companies to be less than the current 80p. In an article back in February, my Motley Fool colleague Cliff D’Arcy noted analysts were forecasting 67p (a 16% reduction).

Today, the company-compiled consensus on GSK’s website is 54.6p (a 32% reduction), giving a yield of 3.8% on the current share price. Of course, the analyst consensus could prove to be too optimistic or too pessimistic. As such, there’s a risk I could be in for a lower dividend.

Still, despite the current areas of uncertainty and risks I’ve mentioned, I’d be happy to buy GSK shares today. Ultimately, I think the separation will unlock value. And that the standalone businesses can thrive with energised and focused management.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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