- U.K.’s pharmaceutical stocks offer a buying opportunity in the current economic upheaval, given their defensive nature and the vast global footprint
- GSK has become a leaner and more-focused company after its recent restructuring
- Haleon’s spinoff allows GSK to sharpen its focus on developing new medicines and give it more financial firepower to seek growth opportunities
It’s been an interesting year for U.K. investors. After outperforming all other developed markets until October, the benchmark took a sharp downturn last week when investors shunned the nation’s securities after new Prime Minister Liz Truss announced a mini-budget that doubted the country’s financial credibility.
The broad-based market rout sent risk assets, bonds, and the tumbling last week.
The sell-off in the nation’s currency was so steep that it prompted Truss to reverse the plan, leading to a rebound in the FTSE in the last few days.
However, the volatility and the favorable exchange rate have opened many opportunities for foreign investors looking for quality stocks.
For such investors, U.K. pharmaceutical stocks offer one area to focus on, given their defensive nature and vast global footprint. Global pharma companies will also benefit from the U.K.’s currency weakness, as most of their sales are in .
I particularly like GlaxoSmithKline (NYSE:), which has lost about a third of its value during the past three months, a downward move that ballooned its dividend yield to more than 5%.
Here is why I believe GSK makes a good buy-on-the-dip candidate for value-seeking investors in this uncertain environment:
Business Restructuring
London-headquartered GSK has underperformed in recent years due to a series of challenges, including oncology clinical failures and missing out on the lucrative market for the first COVID-19 vaccines, despite being one of the world’s major vaccine makers.
However, it is now a much leaner and more-focused company after its massive restructuring under the leadership of Emma Walmsley.
In July, the pharma giant completed the spinoff of its consumer-healthcare business, Haleon (NYSE:), the maker of Panadol painkillers and Sensodyne toothpaste.
As part of the spinoff, GSK received a special dividend of around 7 billion pounds, significantly reducing the company’s debt load while giving it more flexibility to invest in its drug pipeline.
Healthy Pipeline
Last summer, the company agreed to buy Affinivax Inc. for as much as $3.3 billion, adding possible next-generation vaccines. That deal was followed by its takeover of Sierra Oncology, a maker of targeted therapies for rare forms of cancer, in April.
The new GSK, with a significant focus on the biopharmaceutical and vaccines businesses, has a strong pipeline of drugs that includes vaccines against the respiratory syncytial virus, for which there’s no approved shot yet.
Furthermore, revenue for Shingrix, a shot against shingles that is one of Glaxo’s bestselling products, is expected to double in the next five years.
This is perhaps the reason that many investing models used by InvestingPro indicate that there is significant upside potential in GSK stock.
Source: InvestingPro
One of the major motivations to invest in any pharma stock is to seek income stability due to the sector’s safe-haven status during times of distress. After the Haleon spinoff, I believe GSK’s payout is much safer, with more upside potential.
In the second quarter’s report, the first since the completion of its restructuring, GSK reported a 13% jump in sales year over year, with EPS growth of 6%.
GSK also said its adjusted operating profit margin rose 7%. The company also boosted its outlook for the full year as improving revenues and margins propelled the company to beat expectations for the second quarter.
GSK’s quarterly dividend, which it cut this year from $0.63 to $0.341 because of the spinoff, has become attractive after the recent sell-off. Yielding more than 5% at the time of writing, GSK stock is offering a good entry point to lock in this juicy yield.
Bottom Line
After its recent restructuring, GlaxoSmithKline has become a story driven by growth. GSK’s global footprint and its large portfolio of drug patents shield its revenue from Britain’s current economic upheaval. The recent sell-off in its stock, therefore, offers an opportunity to lock in its higher dividend yield.
Disclosure: At the time of writing, the author doesn’t own GSK. The views expressed in this article are solely the opinion of the author and should not be taken as investment advice.
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