Since the turn of the year, the GlaxoSmithKline (LSE:GSK) share price has fallen nearly 10%. During the same period, the FTSE 100 has performed far worse, losing nearly 20% of its value. GSK’s resilience to the current economic challenges is no surprise to me, and I believe the share price is a bargain at its current price.
GlaxoSmithKline is a £33bn global healthcare behemoth that produces prescription medicines, vaccines and consumer healthcare products. Companies in the healthcare sector are non-cyclical as demand for their products remain high, regardless of the state of the economy. Up to the end of April, its sales had risen by 10% and underlying profits had increased by 14%. These strong fundamentals reaffirm my belief that any share price discount should be viewed as a great opportunity to invest.
Changing shape of the business
GlaxoSmithKline has plans to demerge the consumer healthcare side of the business via a joint venture with Pfizer within two years. The new business will sell healthcare staples, such as toothpaste, pain relief and cold and flu remedies. Consumer loyalty to brands such as Sensodyne and Paradol will ensure robust revenue streams and provide the business with defensive resilience to future economic challenges. The business will be similar in nature to sector rival Reckitt Benckiser, the owner of consumer healthcare brands such as Nurofen and Dettol.
The remaining GlaxoSmithKline business will focus on discovering, developing and selling prescription medicines and enhancing its large portfolio of available vaccines. Its business portfolio will be similar in nature to its sector rival AstraZeneca.
Increasing net debt to facilitate GlaxoSmithKline splitting into two has the potential to create investor uncertainty, which could negatively affect its share price. However, I believe any negative sentiment to the planned demerger is misguided.
It has long been muted by economic commentators that the sum of GlaxoSmithKline’s parts could be worth more than the whole. I don’t think this potential is factored into the current share price as the business is conservatively valued, with a price-to-earnings ratio of just 14.
Since the UK went into total lockdown at the end of March, 41 companies in the FTSE 100 have either cut or deferred their dividend payments.
GlaxoSmithKline is an income investor’s dream, and is one of the few companies in the FTSE 100 that pays a quarterly dividend. Its dividend payments are sustainable and are covered nearly 1.5 times by free cashflow.
The 5% dividend yield is above the FTSE 100 average and dwarfs the sub-3% yields that shareholders of sector rivals Reckitt Benckiser and AstraZeneca receive.
I believe the long-term prospects for GlaxoSmithKline are excellent and that the current share price is undervalued. The dividend payments are sustainable, and the yields are excellent. The pending demerger should be viewed as an opportunity to enhance extra shareholder value.
I am convinced that investing in GlaxoSmithKline at the current share price and reinvesting those generous dividends has the long-term potential to make you rich and retire early.
Ben Race owns shares of GlaxoSmithKline. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.