GSK (LSE: GSK) shares barely moved Wednesday morning, after the pharmaceuticals giant posted a 27% increase in full-year earnings per share (EPS). That’s at actual exchange rates, with EPS up 15% at constant exchange rates.
The dividend has been a bit tricky to follow over the past year, due to GSK’s share consolidation. But the company intends to keep it at an equivalent level in 2023, which would provide a yield of around 4% on the current share price.
It’s not among the FTSE 100‘s biggest yields. But it’s strongly covered by earnings. And it’s a business that needs to retain cash for reinvestment in its research and development pipeline.
On that subject, chief executive Emma Walmsley said: “We continue to build a stronger portfolio and pipeline based on infectious diseases and the science of the immune system, including our potential new RSV vaccine.”
Overshadowed?
Over the past few years, GSK has perhaps been a bit overshadowed by AstraZeneca with its headline involvement in Covid vaccines. And that does appear to show in the relative valuations of the two rivals.
GSK’s adjusted earnings of 139.7p put the shares on a trailing price-to-earnings (P/E) ratio of a little over 10. And forecasts suggest similar levels for the next two years. AstraZeneca, meanwhile, is seeing its P/E forecasts coming down after a few sky-high years. But analysts still have it at 28 for the 2023 full year. AstraZeneca’s forecast dividend yield is only around half of GSK’s.
Undervalued?
Even without that direct comparison, GSK looks like good value for the healthcare sector to me. The pandemic years might have clouded the bigger picture. But I think it’s important not to lose track of GSK’s progress in rebuilding its drugs pipeline. It’s not that many years, after all, since the two UK giants were reeling under the expiry of key blockbuster patents and the growing competition from generic alternatives.
There’s still some way to go for GSK to achieve its five-year aims for the period to 2026, but progress looks good to me. For 2023, the company expects to report turnover growth of between 6% and 8%. It says that should feed through to a 10-12% increase in adjusted operating profit, with EPS growing 12-15%. So it sounds like we could be seeing margins improving too.
Debt
What are the risks? For me, I don’t like GSK’s debt. Net debt stood at £17bn at the end of 2022. It’s coming down, thanks in part to the disposal of the company’s consumer health business. And it might not look too much for a company with a market cap of £58bn.
But coupled with the second risk factor, the sometimes intermittent nature of pharmaceuticals revenues in the short-to-medium term, that amount of debt does make me a bit twitchy.
Still, as a prospect for long-term dividend income, GSK is definitely on my list of possible buys in 2023. The fact that I think the valuation is too low now is a bonus.
