What should investors do when core shareholdings fall out of favour? Should they cut their losses by selling up and moving on? Or should they stick with key stocks by holding on for future recovery? At the moment, this is my dilemma with my largest shareholding, my shares in £62.3bn pharma giant GlaxoSmithKline (LSE: GSK). The GSK share price seems to be in freefall, so is should I give up and invest elsewhere?
GlaxoSmithKline shares head for 10-year lows
The GSK share price hovered around 1,217p, down 1.7% on Friday as I wrote this (although it finished the day ‘only’ 1.08% down). Also, it has fallen 12.1% over the past month. This puts GSK at #100/100 among FTSE 100 shares in terms of share-price performance over the past 30 days. Ouch.
Furthermore, GSK’s share price is down 11.2% over three months, 18.8% over six months, 25.7% over a year, 21.1% over two years, 6.% over three years and 10.2% over five years. Thus, GlaxoSmithKline’s stock has been in steady decline for a long, long time. As a GSK shareholder, I regret not selling in January last year, before Covid-19 wreaked havoc on global markets. On 17 January 2020, GSK shares closed at 1,846p and then peaked at an intraday high of 1,857p a week later. This was the GSK share price’s highest point in almost two decades, approaching levels not seen since 2001. Now, 13 months later, they have crashed more than a third (-34.5%) from their 2020 high.
Three reasons why I’ll keep holding GSK
The fall in the value of my family’s GSK holdings over the past 13 months has been very steep. By my reckoning, it is more than enough to buy a lovely holiday home. Yet, despite this substantial paper loss, we’ll hang onto our GlaxoSmithKline shares for now. Here’s why.
First, as GSK’s share price falls, its dividend yield increases. With the yearly dividend stuck at 80p a share for the past five years, GSK now offers an even higher income stream. At 6.5% a year, it’s more than twice the dividend yield of the wider FTSE 100. As we hold GSK largely for income, I would prefer to keep our share of its £4bn yearly cash payout.
Second, GSK’s most recent quarterly results revealed 2020 sales up 1% to £34bn, pre-tax profit up 16% to £7bn, and earnings per share (EPS) of 115.5p, up 23%. It also confirmed an expected dividend of — you guessed it! — 80p a share for 2021. Though EPS will decline in 2021/22, GlaxoSmithKline aims to launch at least 20 new biopharma products by 2026.
Third, as a long-term value investor, I like buying (and not selling) cheap stocks. And I see GSK shares as very cheap in historical terms. Today, they trade on a price-to-earnings ratio of 10.5 and an earnings yield of 9.5%. Nowadays, hardly any UK large-cap shares offer such generous fundamentals to patient investors.
I’ll keep buying more GSK shares
Of course, my faith in GlaxoSmithKline could be very misplaced. Mr Market doesn’t ring a bell when a share price is set to rebound. The GSK share price could continue to decline. It might even fall below £10 to prices not seen in a quarter-century. But I’m optimistic that next year’s split into two companies (biopharma and consumer healthcare) could be positive for shareholders. Hence, I will continue to reinvest my GSK dividends into buying yet more of this dirt-cheap FTSE 100 share!
Cliffdarcy owns shares of GlaxoSmithKline. 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.