Is GlaxoSmithKline stock a buy or sell?

Activist investor Elliott Management has outlined the changes it wants to see at GlaxoSmithKline, what will this do for the pharmaceutical giant’s stock price?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Dice engraved with the words buy and sell

Image source: Getty Images.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The GlaxoSmithKline (LSE:GSK) share price is up almost 1% today. Yesterday, Elliot Management, an activist investor, published an open letter to the Board of Directors of Glaxo. In the letter, Elliott outlined its rationale for taking a stake in Glaxo and what changes it wants to see.

What Elliott Management wants

On page two of the letter, Elliott presents a rather bleak summary of Glaxo shareholder’s returns. According to the table, over 10 years, Glaxo has underperformed its peers in total shareholder return by 210% on average. A particularly sour note for Glaxo shareholders might be the charge that shares in British rival AstraZeneca outperformed Glaxo’s by 166% over a decade.

But, Elliott does not think Glaxo is a lost cause. It would not have built a stake in the company if it did. In fact, the activist investor thinks Glaxo can “generate up to 45% upside in its share price in the lead up to its full separation, and much more in the years beyond.” if it listens to what Elliott has to say.

Glaxo stock split

Now, a note on that separation. Glaxo announced in 2018 that it planned to split into a consumer healthcare company and a biopharma company. And Glaxo management confirmed it plans to push on with this in 2022 in an investor day held this month. The move will lower aggregate dividends, but both companies will have appropriate capital structures and set their own strategies.

I liked the plan to split and was a little worried when Elliott got involved as I feared it wanted to call the whole thing off. However, I can breathe a little easier now, as Elliott supports the split.

Elliot believes that Glaxo has one big problem–investor sentiment. It says Glaxo bosses failed to communicate details of the separation in a timely fashion. The delay allowed questions and doubts to linger in the minds of potential investors. Those questions have been answered. But, Elliott believes the problems go deeper.

According to broker-conducted surveys, investors rate Glaxo management as the lowest quality among selected peers. Analysts, according to Elliott, give some of Glaxo’s pipeline short shrift. But, as Elliott points out, Glaxo’s consumer healthcare business is a global leader. Its drug portfolio has a patent-protected life that compares well to peers. It is the number one player in vaccines globally.

The split should help unlock the value of both these businesses if investors can be convinced. And this is where Elliott is calling for action. Yes, of course, there are calls for improving profitability and investing in R&D, and maximising value, but the quality of its leadership is Elliott’s main gripe with Glaxo.

Glaxo stock price

Elliott wants new non-executive directors with deep biopharma and consumer healthcare expertise appointed to Glaxo’s board. It wants a refreshed board to appoint CEOs with relevant expertise to run the new consumer healthcare and biopharma companies. That sounds like a rebuke to the current CEO’s plans to look after the biopharma business. Elliott seems to think their experience is better suited to managing the consumer healthcare company or another role. 

Overall, I think the split will be positive for Glaxo’s stock price in the long run. I agree with Elliott’s view on sentiment and the need for a management shakeup. I continue to buy Glaxo stock for my portfolio.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James J. McCombie owns shares 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.

More on Investing Articles

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »