GSK: A Muted Valuation And Good Dividend Yield

seekingalpha2023-07-28

Extreme Media Investment Outline The returns in the healthcare industry seem to have been largely muted as more and more people flocked to tech stocks instead and other exciting high-growth industries...

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But this has left a vacuum and upside that needs to be filled. The share price of GSK plc (NYSE:GSK) is down 15% on the 12 months chart, and just slightly up YTD so far. As part of the pharmaceutical industry, the company's earnings are generally speaking quite reliable and consistent and revolve heavily around developing new products and services. Earnings estimates seem quite decent and the low valuation like a p/e of just 9.4 leaves little downside risk right now for investors. For investors seeking a decent dividend yield as well, then GSK is looking very good. A yield of nearly 4% and solid EPS outlooks of around 8 - 9% yearly growth paint a solid investment picture here, I’d say. Recent Developments In recent news for GSK, there was an announcement back on July 10 that Arexvy has been authorized by the Medicines and Healthcare Products Regulatory Agency. The product which GSK makes is aimed at helping with respiratory issues. The market size of RVS is set to be $9 billion by 2029, and some suggest the Arexvy is the best bet to gain a leading position here. Arexvy helps with an active immunization of the prevention of lower respiratory tract disease or LRTD for short. The disease is caused by respiratory syncytial virus in adults 60 years or older, primarily. This is quite impressive news for GSK, as it will mark the first time an RSV vaccine for older adults has been authorized for use in Great Britain by MHRA. Apart from the positive authorization news, GSK has also been able to complete the acquisition of BELLUS Health (BLU). On June 28 the news was announced and GSK makes another addition to its portfolio. BELLUS is a biopharmaceutical company that is working on developing medicine for people who live with refractory chronic cough (RCC). GSK's views on the acquisition are very positive, and they view BELLUS as a potential best-in-class opportunity for selective P2X3. The market position that BLU has here is very strong, and I think it presents GSK a good exposure, seeing the market for RCC medicine growing steadily. Margins   Margin Profile (Seeking Alpha)GSK has been in operation for a very long time and has had the possibility of building up a very good margin profile so far. There are no areas here where I would like to see drastic improvements. The buy case is largely based on the fact that GSK has net margins of over 50% and FCF margins of 11%. This is making it incredibly much easier for the company to be distributing a dividend. Share Price/Dilution (Seeking Alpha)As far as share buybacks, this is not something that the company is engaging in right now. Which could be the reason for the lower multiple the company is receiving. There have been large amounts of debt payments in the last 12 months, $8.3 billion to be exact. This is of course putting GSK in a much better financial position, but there needs to be some more share-holder-friendly actions from the company going forward. Seeing the margins, you'd think a significant amount of earnings would be going to investors. Stock-based compensation continues to be over $400 million and no buybacks are in sight. This is something that keeps me from making GSK a strong buy. Value For Investors The primary value that investors are getting from an investment into GSK right now is from the dividend. That is the most direct benefit. The payout ratio sits at just under 40% which in my opinion still leaves room for more raises in the coming years. The yield sits at just under 4% and this together with the potential upside here is creating a very appealing investment opportunity.   Dividend Estimates (Seeking Alpha)Funding these dividends are the cash flows of the business, which have been up and down in the last 10 years. The highs came in 2017 when it rose to over $16 billion but has since decreased to $4.6 billion. The company saw over $4 billion coming from \"other operating activities\" which seems to have very positively impacted the FCF results that year. It's no a reliable metric to base future cash flows on and seems to have been a one of thing. This has affected the dividend, but as GSK is making acquisitions and funding growth this way, I think the prospects are strong enough for the buy rating. Risks The scheduling of two additional trials for 2024 not only underscores the complexity of the ongoing legal challenge but also raises concerns about the potential duration and associated costs. GSK's proactive defense stance indicates its commitment to addressing the litigation rigorously, but it also indicates that this legal battle might be prolonged over several years. This could result in a muted valuation for the company, as risks of having to face legal settlements on large proportions could impact the financial state of the business. However, I am confident that this short-medium term issue won't make or break the company. The prolonged legal proceedings and the uncertainty surrounding the outcome of these trials could present significant risks to GSK's financial stability and overall reputation in the market. As the company allocates substantial resources to address these legal matters, there might be a strain on its financials, impacting profitability and shareholder returns. GSK Path (Earnings Presentation)In such a scenario, it becomes imperative for GSK's management to proactively manage the legal risks, streamline their defense strategy, and explore potential settlement options to mitigate any adverse financial and reputational effects. This can over time likely be a drag on the valuation of the stock price. But if we see a positive verdict for the side of GSK, I expect it to very much result in a share price increasing quite rapidly. Investor Takeaway Investors that seek a dividend addition to their portfolio that is also trading a fair bit under the rest of the sector should be considering GSK right now, I think. The company has a p/e of just 9.4 and a dividend of 3.9%. I see limited downside from here, but I do acknowledge the fact that the ongoing and expected lawsuits for the company will suppress the valuation of the company.  For what you are getting, though, it seems like a great deal right now. The margins are fantastic and with more acquisitions from the side of GSK, they are building out their product line very efficiently. Given their rich history and position in the market, it lends them more able to make a lot of investments and outgrow broader markets.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2354063313"}