While other pharmaceutical stocks have made gains on the back of coronavirus research, GlaxoSmithKline (LSE: GSK) has failed to do the same. AstraZeneca, for example, is up 30% over the past two years, but the GSK share price has fallen 10% in the same period. I can see three things that I think could help reverse those fortunes.
Firstly no, I don’t think getting in on the Covid vaccine scene now is the way to go. That ship has sailed, and it’s crewed by too many of Glaxo’s rivals.
There’s another thing that I don’t think will work, and that’s time. Yes, it was always going to take a while for Glaxo to get back its pipeline back in shape. But it’s gone on way longer than many had expected, and patience is running out. And it shows in the Glaxo share price.
Earnings have had a few years of modest growth, though 2020 did see a small fall back. But for investors to believe sustainable growth is finally back, I think we need a return to growing dividends. The dividend has remained stubbornly stuck at 80p per share for years. And though last year’s yield did look good at 6%, that was only down to the declining GlaxoSmithKline share price.
Dividend cut first
The problem with the dividend is that it’s going to be cut first. It’s all part of the ongoing demerger plan, which is the second of my events and should cause a seismic shift for the company. Glaxo is set to offload its consumer products business, leaving a ‘New GSK’ to focus on its core pharmaceuticals development.
That new core will target a dividend of 45p in 2023. So that’s a rebasing, but it’s based on the new slimmed-down business. The cut itself could knock the GSK share price a bit. But Glaxo expects the new business to generate more than £10bn in cash by 2026. And if that comes off, we could see a return to progressive dividend growth.
The thing that really seems to be giving Glaxo the push it needs is growing shareholder activism. Activist fund Elliott Management has built up a sizeable stake in the company, and brings with that its reputation for giving underperforming businesses a kickstart. Had Elliott Management not been trying to shake things up, I doubt we’d be seeing the urgency with which the board is now approaching the restructuring.
GSK share price drivers
I guess I’ve listed these things in reverse chronological order. The sequence I envisage is that activism pushes the restructuring, which in turn should pave the way for progressive dividends (albeit at a lower level). And I hope it will all help to boost the GSK share price. That sequence of events does seem to be well under way, so do I want to buy?
I would like to own some of GlaxoSmithKline’s core pharmaceuticals business. But I probably don’t want any of that consumer products stuff. And I wouldn’t be surprised to see a year or two of further share price volatility before my hoped-for effects kick in. So yes, I do think I’ll buy GlaxoSmithKline shares some day. But not yet.