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The GlaxoSmithKline (GSK) share price is falling, and I’m thinking of buying

GlaxoSmithKline (LSE: GSK) seems to have been overlooked in recent years. Attention on the pharmaceuticals sector has been focused on Covid-19. And, possibly as a result, the Glaxo share price has fallen 14% over the past five years.

The company’s done some coronavirus work, but hasn’t captured the limelight like, for example, AstraZeneca. Its peer’s shares have soared nearly 70% over five years. AZN had been doing well before the pandemic, but the big gains have come since the end of 2019.

The more I look, the more I see GlaxoSmithKline as a tempting buy. And I might just tuck some away in my Stocks and Shares ISA.

In July, Glaxo announced Q2 results. The figures enjoyed a favourable prior-year comparison, after 2020 brought a small dip in EPS. But we still saw a 6% rise in second-quarter sales at actual exchange rates (AER).

Earnings figures probably caused a mixed reaction. On a statutory basis, Glaxo recorded 27.9p per share for a 39% drop (at AER), but the firm’s adjusted EPS figure of 28.1p represented a 46% increase. Added to the Q1 figure of 22.9p, it suggests 2021 earnings are likely to get close to 2020 at best. And that might not excite too many people.

But two things in the Q2 update make me think the future’s likely to become rosier. Firstly, “GSK expects to deliver step-change in sales, operating profit growth and performance from 2022, driven by high quality vaccines and specialty medicines portfolio and late-stage pipeline.”

GlaxoSmithKline share price cheap

If that comes off, I think it could lead to an upwards re-rating. Right now, on the current GSK share price, we’re looking at a trailing P/E of a little over 12. AstraZeneca is on a P/E of more than 40. I think a multiple of 12’s too low for a company with Glaxo’s potential.

The other snippet from Glaxo’s Q2 update was the confirmation that it’s going ahead with the “demerger to create new world-leading consumer healthcare company” by mid-2022.

I think that’s a good move, which echoes AstraZeneca’s refocus on drug development. But if things are looking so good, what’s holding back the GlaxoSmithKline share price?

I think there are several things. One is the demerger itself. Consumer healthcare is a very different business to Glaxo’s core R&D work. And there’s little clarity yet as to what the two separate companies are going to look like.

It has even helped keep me away. I mean, I want to invest in a pharmaceutical development company, not a toothpaste merchant. But if I buy Glaxo shares now, I’m likely to end up with some of the latter anyway, after the split.

Dividend uncertainty

I think Glaxo’s dividend is having a negative effect on investors too. It’s been unchanged at 80p for a few years now. That’s a very decent 5.6% yield.

But it’s only thinly covered by earnings, and has been for a while. Confidence in it is probably weak. And we have no idea how the dividend will be split in the demerger.

All this uncertainty makes me suspect the GSK share price could remain depressed for a bit longer. But, overall, it’s a strong candidate for my next investment.

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Alan Oscroft 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.

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