We’re Buying: GlaxoSmithKline (LSE:GSK)

Today was an incredibly tough day for drug and healthcare giant GSK. It finished up 5.9% down for the day on it’s announcement that it expects to cut its dividend in 2022. I can’t say I’m surprised at this news, though the sharp drop was a hefty blow, especially considering we at CI have holdings in GSK. Below, we make the case for why we think the future still looks bright and why were doubling down on GSK.

As always, the following is not financial advice, read our disclaimer

Why the ill health?

Although we don’t think that the share price is falling due to the fundamental operation of the company, it’s no secret that things haven’t been so rosy at Glaxo of late. Although pre-tax profits are up 12%, this is mainly due to the sale of business assets. Real pharmaceutical sales are actually down this year, partly due tot he fact that some of it’s patents on older products have now expired and GSK are being undercut by more modern and better value alternatives. This story continues, as it seems Glaxo has been slow to react in the modernising of pharma products like some of it’s competitors and the share price is showing it. The GSK share price has been depressed right through 2020 from it’s high on 12/01/20 of 1841p to todays pretty poor 1285p. In fact, today actually sparks GSK’s lowest price point in the last 5 years

GSK Price over past 5 years

But wait, there’s more…

However, we don’t think that’s the reason for the steep decline today. It has come to light today that GSK expect to cut their dividend in 2022 and are expecting a bigger drop in profits in 2021 than first anticipated due to the sales impacts of Covid-19. We cant say this is surprising. During the pandemic, sales of many other vaccines and treatments have fallen due tot he continued lockdowns across the world and have no doubt hit GSK hard. We were actually discussing in the past few days that there would be a worry that GSK would cut its pretty healthy dividend, currently yielding over 6%, as it didn’t seem sustainable. Seems the writing was on the wall. However, I’m ok with this, and here’s why.

Bright outlook?

I’m not sure if we’ve seen the bottom yet (all research points to no) but that didn’t stop us from picking up some shares today and we will likely continue to do so if it continues to drop. We feel like there are reasons to be hopeful for the long term prospects of the company and perhaps in 20 years, we will be glad we invested when we did.

“The best thing that happens to us is when a great company gets into temporary trouble. We want to buy them when they’re on the operating table.”


– Warren Buffett

The tale of two companies

In early 202, CEO Emma Walsley announced that GSK would in fact be splitting into 2 more focused companies, one company aimed at cutting edge treatments, R&D and new technologies. The other, the consumer company focusing on power brands. We like this play and think its a good answer to the accusations that GSK isn’t keeping up with the pace of the market. She went on to say:

The fundamentals of GSK’s business remain strong and we are maintaining good momentum on our strategic priorities. This quarter (Q2 2020), we presented promising data and had positive regulatory reviews for new specialty pipeline medicines to treat HIV and Oncology; and made further progress with our Consumer Healthcare integration and Future Ready programs, both of which will prepare the company for separation.

– Emma Walsley

Pent up demand?

GSK also believe that because patient visits to healthcare professionals has been limited due to the pandemic, they will see an uptrend in demand when the worldwide pandemic begins to ease and people begin to visit their doctors regularly again. They feel that there is a lot of ‘underlying demand in the market for our major products and are confident this will be reflected in future performance”. We think this, coupled with strong catalogue of new products coming through should give GSK momentum

Debt

Compared to its market cap, GSK carries a massive amount of debt (48.8bn, which is nothing to be scoffed at!). However, what we have seen is GSK reduce its total debt this year compare to this time last year, which during a pretty difficult year we think is admirable. Not only that, when we crunch the numbers, it turns out that GSK can cover its debt commitment by almost 11 times and is rising. For this reason, we can sleep a little more comfortable knowing that GSK should be able to keep on top of its debt.

Best time to buy?

With the above in mind, especially with a long term portfolio view, we think now is the right time for us to add more GSK shares to our portfolio.

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