UK Markets open in 2 hrs 30 mins
  • NIKKEI 225

    -70.73 (-0.26%)

    +410.97 (+1.57%)

    -0.12 (-0.17%)

    +1.70 (+0.09%)
  • DOW

    +278.24 (+0.80%)

    -784.21 (-2.80%)
  • CMC Crypto 200

    -17.47 (-1.85%)
  • Nasdaq

    +80.23 (+0.55%)
  • ^FTAS

    +13.67 (+0.34%)

GSK shares face dividend cut: should I keep buying?

·3-min read
A GlaxoSmithKline scientist uses a microscope

GlaxoSmithKline (LSE: GSK) shares rose and then fell back on Wednesday, after the company updated investors on its plans to split the business and cut the dividend next year.

Although I’m optimistic about the split, I think that Glaxo shareholders are probably right to be cautious after years of underperformance. The GSK share price has fallen by 14% over the last year and is 5% lower than it was five years ago. In contrast, the share price of rival AstraZeneca has doubled over the last five years.

Time to cut my losses?

In 2022, GlaxoSmithKline will be split into two businesses. New GSK will contain the group’s core pharmaceutical and vaccines business. The company’s consumer healthcare division, which owns brands such as Nicorette and Sensodyne, will be separated into a new company.

Existing GSK shareholders — like me — will receive shares in the new consumer business, which will be listed on the London Stock Exchange. But we’ll have to stomach a big dividend cut. CEO Dame Emma Walmsley says that the total dividend paid by the two businesses next year is expected to be 55p. That’s 30% below the current payout of 80p.

As an income investor, I’ll often sell a stock that cuts its dividend. But in this case, I think what’s happening is that Glaxo’s current management is trying to fix problems that existed before taking charge.

Although I’ve been happy to receive a fat 6% yield from my GSK shares in recent years, I’ve always thought that the payout looked stretched. I’m not going to sell my shares simply because of the dividend cut.

Split could boost growth

Splitting GlaxoSmithKline will create two smaller, more focused businesses. Over time, I think this should lead to better performance and a higher valuation.

However, I think that these plans are also being shaped by Glaxo’s problems — growth has been sluggish and debt is quite high. It looks like the consumer healthcare business will take on a sizeable amount of the group’s existing debt. This should ease the pressure on the pharma business, so it can increase spending on research and development.

I think this is a fair plan, but there are no free lunches. The consumer business is expected to start trading with net debt of four times EBITDA (a measure of earnings). That’s much higher than the 2.4x EBITDA multiple reported by rival Reckitt at the end of 2020. I expect dividends from the new business to be limited until management has paid down some of this debt.

I’d still buy GSK shares

Despite my critical comments, I still see GlaxoSmithKline as an attractive business to own in a long-term portfolio.

I expect the company’s core consumer and pharmaceuticals markets to benefit from long-term global growth.

Management guidance is for the core pharma business to deliver 10% annual profit growth over the next five years. If the company can deliver on this, I think Glaxo shares are probably cheap at current levels.

Am I going to sell my GSK shares? No, I’m not. Although the company faces some challenges, I think that the changes under way should help to fix them. As things stand today, I’d rather be a buyer today than a seller.

The post GSK shares face dividend cut: should I keep buying? appeared first on The Motley Fool UK.

More reading

Roland Head owns shares of 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.

Motley Fool UK 2021

Our goal is to create a safe and engaging place for users to connect over interests and passions. In order to improve our community experience, we are temporarily suspending article commenting