Just over a year ago, the GSK (LSE: GSK) share price was bumping along around a 10-year low. The former FTSE 100 darling had tested investors’ patience for years, as growth stalled and blockbuster drugs lost patent protection. Many long-term shareholders drifted away, frustrated, disappointed and not a little surprised.
Its drugs pipeline was a major issue. As key treatments went off patent, GSK struggled to replenish revenues with new blockbusters. Management froze the dividend for years, diverting cash into research and development while promising investors jam tomorrow. Finally, there’s jam today.
GSK shares have surged 52% in the last 12 months, climbing above £20 for the first time in more than two decades. Throw in a 3% trailing yield, and the total 55% return would have turned £10,000 into £15,500. So is it time to show GSK some love again?
Sensing a potential recovery, I put a sizeable chunk of money into the pharmaceutical giant in March 2024. The valuation looked compelling, with a price-to-earnings (P/E) ratio of eight or nine. Sales were edging up, new treatments were coming through, yet the market remained wary.
FTSE 100 income growth star
Income investors were also lukewarm. The dividend yield hovered around 3.5%, well below the 5% or 6% once paid in its GlaxoSmithKline heyday. I wasn’t entirely convinced myself, but with no pharmaceutical stocks in my portfolio, and high-flying rival AstraZeneca looking super-expensive, I took the plunge anyway. Effectively, I snubbed the sector winner, and bought the loser. Then found myself sitting in on a quickfire 20% paper loss, as the shares dipped.
So I’m thrilled by the recovery, which suddenly leaves me sitting on a total return of roughly 40%, including reinvested dividends. Is there more to come?
On 4 February, GSK published its first full results under new chief executive Luke Miels. Total operating profit almost doubled to £7.93bn, although core operating profit rose a more modest 8% to £9.7bn.
Challenges remain. More than half of GSK’s revenues come from the US, leaving the group exposed to uncertainty over tariffs and government drug pricing policy. The board has also indicated that sales growth could slow to between 3% and 5% this year, down from 7% in 2025. From 2028, several major HIV treatments will lose patent protection. So far, markets have largely shrugged this off.
Investment risks and rewards
Pharmaceuticals are often viewed as defensive, on the basis that people still fall ill in a recession. In reality, the sector carries significant risks, such as hefty R&D costs, lengthy approval processes, patent expiries and the threat of litigation if side-effects emerge.
Even after the rally, GSK trades on a reasonable P/E of around 12.7. However, consensus forecasts suggest a median 12-month price target of 2,039p, which is almost 10% below today’s 2,239p. Even a recent target hike from JPMorgan to 2,250p implies limited growth in the near term. The trailing yield has slipped to 2.95%, although it’s forecast to hit 3.26% across 2026.
I believe GSK is worth considering for diversification, and I’m pleased with my timely investment. But after such a strong run, I’m not rushing to add more. Investors may have had their fun for now.
