The GlaxoSmithKline (LSE: GSK) share price was £14.23 when I last wrote about the company three weeks ago. This was shortly before management issued an investor update on 23 June. The update was all about ‘New GSK’ — after the planned demerger of the consumer healthcare business — and a new dividend policy.
My pre-update article was titled Why I’d buy GSK shares despite the coming dividend cut. Having now read and digested the company’s plans and new dividend policy, and with the shares up a whopping (not!) 0.8% to £14.35, am I still keen on the stock today?
Dividend outlook
In the investor update, GSK reiterated its previously stated intention to pay a dividend of 80p per share for 2021. This had been the annual payout going back to when Roy Hodgson was manager of the England football team!
The company had also previously said that for 2022 it expected the aggregate dividend of New GSK and New Consumer Healthcare to be less than 80p. It hadn’t put an exact figure on it, but the analyst consensus was 54.6p. This turned out to be pretty much bang on the money. In the investor update, management said it expects the 2022 aggregate dividend to be 55p.
At the current GSK share price, the 2021 80p dividend represents a yield of 5.6%. The 31% reduction to 55p in 2022 brings it down to 3.8%. The company also told us that New GSK will have a progressive dividend policy starting at 45p (3.1% yield) in 2023. There’ll be the New Consumer Healthcare dividend too, but this will be down to its new board of directors.
The dividend outlook is in line with what I expected. As such, the payout prospects don’t negatively impact my previous positive view of the stock.
GSK share price prospects
I think GSK’s reduced, but more sustainable and progressive, dividend makes the company a better investment proposition. The rebasing of distributions to shareholders will allow management to increase New GSK’s R&D and commercial investment in vaccines and speciality medicines. This should underpin long-term sales and profit growth. And in turn, the progressive dividend.
Aside from the better balance between shareholder distributions and investment for growth, I felt the demerger of the consumer healthcare business could unlock value for shareholders. Due to what I think is a current ‘conglomerate discount’, I reckon the two businesses will be valued more highly by the market as standalone companies. This could provide an added boost to GSK’s share price.
Nothing in the investor update has changed my view that the separation will ultimately unlock value for shareholders and that the standalone businesses can thrive with energised and focused management.
On the subject of management, GSK’s board “strongly believes” current CEO Emma Walmsley is the right leader for New GSK. However, given her background and experience in the group’s consumer healthcare business — and before that 17 years with personal care company L’Oréal — there’s an argument she may not be the most effective leader of a business focused on new vaccines and speciality medicines.
Despite this risk, and the risk around delivering the demerger successfully, I continue to like GSK. It may not quite be the bargain of the century, but I think it’s a very buyable stock for my portfolio at the current share price.
