GlaxoSmithKline (LSE: GSK) has been a relatively poor investment over the past decade, however attractive the Glaxo share price has looked. According to my research, including dividends paid to investors, the stock has produced an average annual return of 5.5% over the past decade. That is compared to the FTSE All-Share Index yearly total return of 7.3%.
Over the past year, the company’s performance has picked up, although not by much. The stock has produced a total return of 19.4% over the past 12 months. That compares to 15.2% for the FTSE All-Share Index.
However, I think the next 12 months could be a transformative period for the Glaxo share price. That is why I would buy the stock for my portfolio for this year and beyond as the company rebuilds for the next growth phase.
Glaxo share price restructuring
For as long as I can remember, investors and analysts have been calling for the company to break itself up. They have argued that the enterprise does not make sense in its current form. The slower-moving consumer healthcare business does not fit well alongside the faster-growing vaccines and drug development business.
Slow and steady consumer companies also tend to attract lower valuations than fast-growing drug development corporations.
Glaxo laid out its plans to break up in 2020, and the split is finally set to take place next year. Investors will be given shares in a new consumer healthcare company, while the pharmaceutical and vaccines business will stay as one.
The company will be passing on the majority of its debt to the consumer business. This makes sense because consumer healthcare is more predictable than pharmaceuticals. Unfortunately, this debt switch, coupled with the pharmaceutical arm’s requirement for reinvestment, will mean a dividend cut.
Analysts are forecasting a reduction of 31% overall. The payout is likely to remain lower for the consumer business as it reduces debt.
Still, for the pharmaceutical side of the enterprise, operating profit growth will average more than 10% a year. Vaccine production and development, as well as speciality medicine sales, will contribute to growth.
Higher valuations
Considering all of the above, I think the stock is cheap, considering its potential. Investors will be willing to pay more for the pharmaceutical and consumer healthcare businesses, despite the lower dividend.
The simplicity of the consumer healthcare business may attract a different class of investor that is willing to pay more for stability. At the same time, the growth side may attract growth investors, who could also be willing to pay more.
Of course, there is no guarantee this scenario will play out. Trying to predict if a stock will be worth more or less in a year than it is today is almost impossible. The group could have to deal with additional costs and even extra regulations that could upset the demerger. This is something I will be keeping in mind.
Nevertheless, overall, I think the Glaxo share price is extremely attractive as an investment for 2022.
Rupert Hargreaves has no position in any of the shares mentioned. 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.
