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GSK shares: should I buy now?

Image: GlaxoSmithKline

I’ve been willing to give pharma giant GlaxoSmithKline (LSE: GSK) the benefit of the doubt over the years. While GSK shares have remained stuck within the trading range of 1,000p–2,000p for over two decades, the dividend stream has remained rewarding for those owning the stock.

Does confirmation of a forthcoming cut to the payout change things? Here’s my take.

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Wait – the dividend’s being cut?!

That’s the plan. Let’s briefly recap yesterday’s news. It was announced Glaxo would list its consumer healthcare business as a separate company in the middle of 2022. By doing this, the FTSE 100 member aims to generate cash to use for developing drugs at its pharmaceutical business (New GSK). The latter has struggled in recent years due to a wobbly pipeline. Clearly, the global pandemic hasn’t helped either. Glaxo said it was now aiming to grow sales here by more than 5% a year to 2026. 

In line with this plan, Glaxo announced yesterday that its big-but-stagnant annual payout would be cut. In 2022, the aggregate dividend from GSK and the now separate New Consumer Healthcare business will likely be 55p. That’s a little over 30% lower than the amount investors currently receive (80p). From 2023, New GSK will pay 45p per share to holders. 

While this cut is far from insignificant, it’s less than analysts had feared. This may explain why the GSK share price reacted favourably to yesterday’s news, at least initially. Unfortunately, this buying pressure gradually dissipated as the day went on as investors digested the news.

So, would I buy GSK shares now?

On the one hand, I do see some upside. Historically, many spin-offs tend to have done well once they’ve been released from the shackles of their parent companies. Considering the strong brands it shares with Pfizer (Sensodyne toothpaste, Advil painkillers), I’m can instantly think of worse firms to be invested in than New Consumer Healthcare.

Owning shares of both businesses in such defensive sectors might also be prudent if (and that’s a big ‘if’) markets become increasingly choppy as inflation fears grow. Moreover, GSK shares look good value relative to peers at 14 times forecast earnings. And while a dividend cut is never good news for income investors, the payouts should still be attractive enough. 

On the flip-side, I do understand why some existing holders may be mulling over whether to sell. Yes, the pandemic has proved disruptive for most businesses. Nevertheless, the GSK share price hasn’t fared well under CEO Emma Walmsley’s leadership.

Sure, earnings targets provide clarity and sound great on paper, but I’m sceptical over whether the new strategy can really be achieved under the current management team. Drug development can also be a painfully slow process, regardless of who’s in charge and how much money is thrown at it.

Bottom line

Time will tell whether those owning GSK shares are truly willing to embrace the new strategy. If I already held the shares, I’d probably keep holding for the income they generate and hope dividends would rise in time.

If I favoured capital growth over income and didn’t already own the stock however, I’d certainly take the time to look at other opportunities. Today’s rather muted opening suggests I’m not the only one to think that greater gains can be achieved elsewhere. 

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Paul Summers has no position in 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.

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