The GlaxoSmithKline (LSE:GSK) share price has been performing quite poorly so far this year. In late February, it dropped below 1,200p compared to its 1,800p high just a year before.
But around a month ago, the GSK share price started climbing. In fact, it’s up more than 10% in the last month. And for a large blue-chip pharmaceutical company, that is quite impressive. At least, I think so. What’s going on? And should I be adding this business to my portfolio?
The rising GSK share price
From what I can tell, one of the primary reasons behind the recent increase is a newly published report by the Financial Times. It revealed that the activist hedge fund, Elliott Management, has purchased a multi-billion stake in the FTSE 100 business.
Elliot Management is a New-York based firm run by billionaire Paul Singer. It has a reputation for establishing prominent positions in major companies that are not achieving their full potential and forcing changes to improve performance.
It’s currently unclear as to how much the firm has invested. But its track record of improving large UK companies is pretty substantial. Examples include Whitbread, where it called for Costa Coffee to be spun off. And BHP, where the mining firm was forced to make considerable changes to its operating methods.
As so, with shares being bought up along with seemingly improved investor confidence for GSK’s future potential, the share price is on the rise.
Why is Elliott Management getting involved?
Personally, I’m not all too surprised by the announcement. GSK looks like the exact kind of business Elliott Management tends to get involved with.
Over the last five years, the stock has provided relatively lacklustre performance, returning -10% to investors. By comparison, its main competitor, AstraZeneca, is up more than 80% over the same period. And while the firm has continually and consistently paid out dividends, these haven’t grown for years due to the dilution effect of issuing new shares.
Another potential reason could be the uncertainty surrounding its plans to spin off its consumer healthcare division. The original announcement has had a significant influence on the GSK share price and is likely a contributing factor to its decline. Why? Because the management team announced that dividends will probably be cut once the spin-off is complete.
According to Bloomberg Intelligence, Elliott Management could push to sell the business or put it through an IPO instead of a spin-off as a means to return invested capital to shareholders. For now, I’ll have to wait and see.
Is it time to invest?
Whether Elliott Management’s involvement will be a value building endeavour has yet to be seen. But even if it fails to achieve what it has set out to do, I can’t deny that the GSK share price looks a bit low to me. And that’s even after its recent rise.
Based on the forecast earnings for 2021, which is 102p per share, the forward P/E ratio of the business is around 13. By comparison, AstraZeneca is currently sitting at 44 today.
Having said that, I won’t be adding it to my portfolio today. At least, not until more information becomes available regarding its spin-off of its consumer healthcare division.
Instead, I’d much rather invest in this:
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Zaven Boyrazian does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.
