Since being founded in 2000, GlaxoSmithKline (LSE:GSK) has expanded to become the sixth-largest pharmaceutical company in the world, according to Forbes. It also has the fourth-largest market cap in the London Stock Exchange at £81bn. Many of my colleagues at The Motley Fool believe this is just the start of its recovery and are keen to invest in GlaxoSmithKline shares. I can understand why.
The case for GlaxoSmithKline shares
Cliff D’Arcy has been invested in the company for three decades. Despite his long-standing disappointment with GlaxoSmithKline shares – it is down £1 on its price 25 years ago – he is hanging on thanks to the potentially promising involvement of activist hedge fund Elliott Management.
Elliott’s aggressive activist involvement should encourage the company to increase its value. This should, in turn, increase the worth of its shares. The level of confidence displayed by the hedge fund through a nine-figure investment should hopefully lead to good things.
On top of this, GlaxoSmithKline shares have risen by more than 12% in the last two months. It also currently boasts a dividend yield of about 6%. One could conclude that now is a great time to buy a cheap stake in a huge company.
Why I’m not keen
As mentioned, its long-term performance has been pretty terrible. Many investors remaining from the last century are currently sitting on a loss. Even with Elliott on board, if the company hasn’t been able to grow in twenty-five years, there are certainly no guarantees now.
It also missed out on the chance to develop its own Covid-19 vaccine. This was a big factor in the recovery of other FTSE 100 pharma companies like AstraZeneca (LSE:AZN). Its low last March was £62.21, with its price currently up 23% to £76.93. GlaxoSmithKline shares hit £13.74 in March 2020 and have dropped by 3% since then.
With the current focus on Covid-19, I’m more inclined to follow the recovery of the companies working in that field.
The pandemic also reduced revenue from sales of non-Covid-19 vaccines by 32% as they were put on the backburner. It was even hit with a 19% drop in over-the-counter sales as more common illnesses became less prominent thanks to social distancing. This led to an 18% drop in revenue in Q1 of 2021 in comparison to the same period in 2021.
GlaxoSmithKline shares aren’t benefitting from other issues within the company either. Bintrafusp alfa – a cancer drug – failed an important trial in January, and a promising partnership with Sanofi has been hit with more delays.
Even GSK’s dividend is probably going to be cut. The firm plans to split in two in order to focus on consumer health in one division, and on HIV, vaccines, and pharmaceuticals in the other. This split would likely mean that it would no longer reach its current dividend yield.
For these reasons, I’ll be avoiding GlaxoSmithKline shares for the time being. As mentioned above, though, there are many factors to reconsider once the uncertainty of Covid-19 is a distant memory.
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Dan Peeke 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.