Today, I discovered that I haven’t written about pharma giant GSK (LSE: GSK) for almost three months. Not one mention of this heavyweight FTSE 100 stock since 13 February. This surprised me, as it was my largest stock holding for decades — when I was almost glued to the GSK share price.
Leaving GSK
Though my wife and I still own its shares, but these holdings are a fraction of our former stakes. Indeed, for much of the past three decades, my wife’s investment in this UK business was one of our largest assets.
However, after being given redundancy and enhanced early retirement from GSK in spring 2021, she sold almost all of her GSK holding. This was a smart move, as her company agreed at the time to pay all taxes on these sales (some forced).
Despite this disinvestment, we still have a non-negligible stake in the UK’s second-largest healthcare company.
The share price has slumped
Today, I noted that the share price has fallen back since rising high earlier this month.
On 6 April, the shares hit their 2023 closing high of 1,523p. On Friday, they closed this month at 1,441p, down 5.4% from this calendar year’s peak. At this level, the biopharma/vaccine business is valued at £59bn, making it a FTSE 100 stalwart.
What’s more, on 6 July last year, this popular stock hit 1,842.76p — 27.9% above its present level. Over one year, the shares are down 20.6%, while they’ve lost 3.4% of their value over five years.
So have GSK shares moved into what I see as bargain-bin territory?
It may be undervalued today
It’s been many years since I bought GSK shares for fundamental reasons. Most of our latest holdings came from automatic dividend reinvesting, or from free or discounted stock awards given to my wife.
But I’m thinking about adding to my holding once again. As an old-school value investor, I aim to buy shares in solid companies trading at reasonable prices. And I think this might be the case here.
At the current share price of 1,441p, the stock trades on a price-to-earnings ratio of 13.1, for an earnings yield of 7.7%. That’s broadly in line with the wider FTSE 100’s fundamentals.
However, these shares offer a dividend yield of 5.2% a year, covered 1.5 times by earnings. This is considerably ahead of the Footsie’s yearly cash yield of around 3.7%.
Then again, these are trailing — that is, historic — figures, so will change as 2023’s earnings results roll in. Based on analysts’ forecasts, GSK’s forward-looking P/E ratio and dividend yield are 10.3 and 4.3% respectively. Not bad, but not mouth-watering.
I expect the share price to go higher
One problem for GSK is that it’s been a long time since the group recorded strong growth in revenues and earnings. But that might be set to change, as its future pipeline strengthens. And it’s a very different company today than before last July’s demerger.
For the record, I can see the share price going higher from here, but I won’t be buying today. To me, the shares aren’t quite cheap enough. Also, I already have my legacy holding, plus I’m rather short of cash to invest right now!
