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Should I ignore the falling GlaxoSmithKline share price and pocket its 6% yield anyway?

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Many people assume the pandemic would be positive for pharmaceutical stocks but the falling GlaxoSmithKline (LSE: GSK) share price tells a different story. It has now trading 25% lower than a year ago.

While you should treat past performance with caution, this is both surprising and disappointing. It’s not a one-off fall either. The GlaxoSmithKline share price has gone precisely nowhere, measured over five years. Despite that, the FTSE 100 pharma giant remains one of the UK’s most popular stocks, lauded for its thumping dividend yield. Should I buy Glaxo for the income, or shun it after the share price slump?

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Right now, Glaxo yields 5.86%. That is a terrific level of income, especially today. You cannot directly compare a dividend yield to the interest rate on cash, as the latter is pretty much guaranteed. However, Glaxo’s yield looks tempting at a time when the average easy access account pays just 0.18%.

I’m checking out the GlaxoSmithKline share price

Yields are funny things, though. They are calculated by dividing a company’s dividend per share, against its share price. Right now, Glaxo’s dividend per share stands at 80p, while its share price is 1,365p. So 80/1,356 = 5.86.

When a company’s share price is falling, as seen with GlaxoSmithKline, the yield rises (all things being equal). So a high yield is often the sign of a struggling company, rather than a thriving one.

Glaxo certainly faces challenges right now, as Credit Suisse has just noted. It highlighted poor R&D productivity, and said management needs to invest more in the drugs pipeline. 

Another worry is that its shingles vaccine, Shingrix, cannot be taken alongside the Covid-19 vaccine. This will hit a key source of revenue growth, especially if populations need to be vaccinated year after year.

Here’s another reason why the GlaxoSmithKline share price is under pressure. CEO Emma Walmsley is planning to spin off its consumer joint venture with Pfizer. Credit Suisse has warned this could threaten shareholder payouts, as Glaxo’s biopharma operation “would need to pay out 84% of earnings to maintain its 80p dividend”.

The GlaxoSmithKline share price is not falling by accident. FTSE 100 rival AstraZeneca‘s share price has scarcely dipped over the last 12 months, and is up 80% measured over five years. 

Still a top FTSE 100 dividend stock

That said, many investors like buying companies that have suffered short-term setbacks, because they are often available at bargain prices. Currently, the GlaxoSmithKline share price trades at just 11 times earnings, which is one of the lowest valuations I can remember.

Earnings growth has been slowing, though. In 2016, earnings grew 35% but this has since slowed to 9%, 7%, and 4% a year. The trajectory is clear.

I would never buy the GlaxoSmithKline share price with a short-term view, or any stock for that matter. I  look to hold it for at least five years, and ideally 10 or 20 years. Over that time scale, today’s worries will seem like a blip. But today’s buyers will continue to benefit from today’s low entry price.

I find myself tempted by the falling GlaxoSmithKline share price. Even more so by its yield. Even if it cuts its dividend, I should still get a generous level of income.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK 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.

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