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GSK (LSE: GSK) shares barely moved on Wednesday morning after the pharmaceutical giant posted a 27% rise in full-year earnings per share (EPS). That’s at real exchange rates, with EPS up to 15% at constant exchange rates.
The dividend has been a bit tricky to follow over the last year, due to the consolidation of GSK shares. But the company intends to keep it at an equivalent level in 2023, which would give it a return of around 4% over the current share price.
is not among the FTSE 100The highest yields of . But it is heavily covered by earnings. And it’s a business that needs to hold on to cash to reinvest in its research and development portfolio.
On that topic, Chief Executive Emma Walmsley said: “We continue to build a stronger pipeline and portfolio based on infectious disease and immune system science, including our potential new RSV vaccine..”
eclipsed?
In recent years, GSK has perhaps been somewhat overshadowed by AstraZeneca with its main involvement in Covid vaccines. And that seems to show in the relative valuations of the two rivals.
GSK’s adjusted earnings of 139.7 pence put the shares at a price-earnings (P/E) ratio of just over 10. And forecasts suggest similar levels for the next two years. AstraZeneca, meanwhile, is seeing its P/E forecasts fall after some very high years. But analysts still have it at 28 for the full year of 2023. AstraZeneca’s expected dividend yield is only about half that of GSK.
undervalued?
Even without that direct comparison, I find GSK a good value for the healthcare sector. The pandemic years might have clouded the big picture. But I think it’s important not to lose sight of GSK’s progress in rebuilding its drug portfolio. It hasn’t been all that many years, after all, since the two UK giants were reeling from expiring blockbuster patents and growing competition from generic alternatives.
There is still some way to go for GSK to achieve its five-year targets for the period to 2026, but progress looks good to me. By 2023, the company expects to report revenue growth of between 6% and 8%. He says it should translate to a 10-12% increase in adjusted operating profit, with EPS growth of 12-15%. So it looks like we could be seeing some improvement in margins as well.
Debt
What are the risks? I don’t like GSK’s debt. Net debt stood at £17bn at the end of 2022. It is declining, thanks in part to the sale of the company’s consumer health business. And that may not sound like much for a company with a market capitalization of £58bn.
But coupled with the second risk factor, the sometimes intermittent nature of short- and medium-term pharmaceutical revenue, that amount of debt makes me a little nervous.
Still, as a long-term dividend income outlook, GSK is definitely on my 2023 buy list. The fact that I think the valuation is too low now is a bonus.
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