Comment: investors ‘won’t appreciate the overhang’ following GSK spin-off

At an update to investors, GlaxoSmithKline (GSK) provided details of its strategy, outlook for growth and plans to create shareholder value, following the planned demerger in mid-2022 of its Consumer Healthcare business. An equity research expert suggests that while targets are friendly, investors will not get a completely clean break from the new consumer business.

New GSK targets include sales growth of more than 5% and adjusted operating profit growth of more than 10% CAGR 2021-26. The company’s sales ambition is more than £33 billion (CER) by 2031. It intends to place strategic focus to prevent and treat disease, with R&D leveraging science of the immune system, human genetics and advanced technologies. The cash generated from operations is expected to exceed £10 billion by 2026.

Chris Beckett, Head of Equity Research at Quilter Cheviot, a UK-based investment firm, responded to the announcement: “GSK’s announcement contained a whole host of market friendly targets, including a welcome target for double digital profit growth over the next five years that will need to be underpinned by a belief in the products in development and the segments the company will be focusing on.

“The dividend reset, which works out at a 31% cut, is hardly good news, but it is not unexpected considering long-term concerns around true free cash flow cover. At 55p, the aggregate dividend across the two new companies works out to be a yield of 3.9% for FY22 versus the 6% yield for FY21.

“It will not be a completely clean break from the new consumer business. The rationale for an ongoing investment in the consumer business will need to be explained by the executives. Investors won’t appreciate the overhang.”

Image credit: Willy Barton / Shutterstock.com

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