Editor’s note: an earlier version of this article used an outdated dividend yield figure; the post has now been updated accordingly.
GSK (LSE:GSK) shares have flatlined in 2023 so far, slightly trailing the FTSE 100 index. But, it’s the biopharma company’s 3.84% dividend yield that stands out to me. This beats the Footsie average of 3.68%.
The stock is already an important part of my dividend portfolio. Nonetheless, I’d like to expand my position in the company to target a £500 annual passive income haul.
Here’s how I’d approach that goal.
Dividend investing
As I write, GSK shares trade for £14.71 each. At today’s dividend yield, that means I’d need to invest a total of £13,033.06 in the company to scoop up 886 shares. With that shareholding, I could expect to earn a smidgen over £500 each year in passive income.
At present, I don’t have that amount of spare cash to buy the shares in one go. Plus, I wouldn’t want to sell my other stocks to replace them with GSK shares. That’s because I believe there are considerable merits to diversification and I don’t want to be too exposed to any single company.
After all, there’s a perennial risk with dividend investing that a business can axe or suspend its shareholder distributions at any point. That risk applies to GSK despite its solid track record on payouts. Indeed, the company’s dividend history isn’t flawless. It lost its long-held Dividend Aristocrat status under current CEO Emma Walmsley’s leadership.
Nonetheless, as my portfolio grows, I see the company as a core element of my passive income strategy. I plan to reinvest my dividends into more shares and work my way towards a £500 annual income target over the long term.
Profits, pipeline, and P/E ratio
So, what’s the outlook for the GSK share price?
Perhaps the darkest cloud on the horizon is ongoing litigation concerning the alleged carcinogenic properties of the firm’s discontinued heartburn medication Zantac. Shareholders will cheer the recent dismissal of a Canadian lawsuit, but the company still has to defend a number of class actions in other jurisdictions.
Beyond the courtroom, there are promising signs in the firm’s latest financial results. GSK delivered Q1 sales and profits that exceeded analysts’ expectations, underpinned by strong sales of its shingles vaccine Shingrix.
Revenue (excluding Covid-19 solutions) increased 10% to £6.95bn, beating the City estimate of £6.5bn. Adjusted earnings per share climbed 7% in constant currencies — 11% higher than the consensus forecast.
What’s more, GSK recently raised $1bn from selling a partial stake in Haleon, its former consumer health arm before the July 2022 demerger. It still owns the bulk of the shares it retained, which will prove a useful future source of cash.
Perhaps that’s just as well. After some recent acquisitions, the drugmaker is looking for more takeover targets to bolster its pipeline. This currently comprises 68 vaccines and specialty medicines.
There are concerns that the business lags competitors, such as FTSE 100 bedfellow AstraZeneca, in R&D. That’s especially true in light of the 2027 patent expiry for its HIV treatment compound, dolutegravir.
Nevertheless, GSK trades on a low price-to-earnings (P/E) ratio below 4.5, which is a smaller multiple than many rivals. On balance, the stock looks undervalued to me, and I’ll continue to invest more in the months and years ahead.
