Demand for healthcare stocks usually rises in times of extreme economic uncertainty like these. However, the GlaxoSmithKline (LSE: GSK) share price has dropped over the past year. Sure, GSK’s share price might be off the 10-year lows ploughed back in March. But over the past 12 months, the company’s lost almost 20% of its value.
The predictability of medicines demand during economic upturns and downturns means that UK shares like GlaxoSmithKline are usually popular when the world appears to be going to hell in a handcart. So why are investors giving the FTSE 100 firm a wide berth? What can we expect the GSK share price to do next? And would I buy it for my own shares portfolio?
There are several reasons why the GSK share price could resume its recent slump. These include:
#1: Divestment concerns: As my Foolish colleague Zaven Boyrazian recently explained, GlaxoSmithKline’s plans to divest its consumer healthcare operations have shaken investor confidence. Why? Well the business plans to concentrate on becoming a pureplay pharmaceuticals developer. And this increases the risks GSK investors must endure as drugs production can be problematic. Costs can balloon and testing setbacks can cause launch delays. That’s if the drugs can be launched at all depending on regulatory hurdles. News of R&D problems at GSK in the weeks and months ahead would surely worsen these concerns.
#2: Dividends come into focus: Glaxo has a proud dividend record and it has kept paying 80p per share annual rewards even as earnings have fluctuated. But speculation that payouts might finally be scythed down have gained traction recently. Drugs production is an expensive business and dividends might suffer as the company develops its pipeline. Setbacks with testing could also lead to a more conservative dividend policy as this could hit profits forecasts hard.
Why I love the GSK share price
That being said, there are several things that could help the GSK share price soar again. A company doesn’t get to the FTSE 100 without being a world-class operator in its field. And GlaxoSmithKline has a terrific track record of getting its products from lab bench to pharmacy shelf in fast-growing therapy areas like HIV and oncology. Positive testing news concerning its product pipeline could easily light a fire under investor demand.
Glaxo’s R&D pedigree isn’t the only reason why I, as a long-term investor, am attracted to the UK share. Global healthcare spending is tipped to keep growing as populations rise and emerging market wealth levels improve. This naturally provides excellent opportunities for GSK’s world-class drugs portfolio. I’m also encouraged by the company’s new drive to focus on the higher-margin business of pharma research and development.
Today the GSK share price is around £13 per share. This results in a forward P/E ratio of 15 times, a reading I think is quite undemanding for a stock of this calibre. Combine this with a 6.2% dividend yield for 2021 and I think Glaxo is a great FTSE 100 stock for me to buy right now.
Royston Wild 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.